Ocera Therapeutics, Inc.
Ocera Therapeutics, Inc. (Form: 10-Q, Received: 08/14/2013 18:03:11)


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549  
___________________________________________________________
 
FORM 10-Q
(Mark One) 
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended June 30, 2013
 
or
 
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from                to                
 
Commission File Number 001-35119
___________________________________________________________
  
Ocera Therapeutics, Inc.
(Exact name of registrant as specified in its charter)
 
DELAWARE
 
63-1192270
(State or other jurisdiction of incorporation
 
(I.R.S. Employer
or organization)
 
Identification No.)
 
12651 High Bluff Drive, Suite 230
 
 
San Diego, CA
 
92130
(Address of principal executive offices)
 
(Zip Code)
 
(858) 436-3900
(Registrant’s telephone number, including area code)

Tranzyme, Inc.
5001 South Miami Boulevard, Suite 300
Durham, NC 27703
(Former name or former address, if changed since last report)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  x   No  o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  x  No  o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See the definitions of “large accelerated filer,”  “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large Accelerated Filer o
 
Accelerated Filer o
 
 
 
Non-Accelerated Filer o
 
Smaller Reporting Company x
(Do not check if a smaller reporting company)
 
 




 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  ¨   No  x
 
The number of shares outstanding of the registrant’s Common Stock as of August 1, 2013 was 11,287,943 .





OCERA THERAPEUTICS, INC.
INDEX
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

Cautionary Note Regarding Forward-Looking Statements

 Certain statements in this Quarterly Report on Form 10-Q constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and are usually identified by the use of words such as “anticipates,” “believes,” “estimates,” “expects,” “forecasts,” “intends,” “may,” “plans,” “projects,” “seeks,” “should,” “will,” and variations of such words or similar expressions. For this purposes, any statements contained herein, other than statement of historical fact, including statements regarding our strategy, future operations, financial position, future revenues, projected costs, prospects, plans and objectives of management, may be considered forward-looking statements. We intend these forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in Section 27A of the Securities Act and Section 21E of the Exchange Act and are making this statement for purposes of complying with




those safe harbor provisions. These forward-looking statements reflect our current views about our plans, intentions, expectations, strategies and prospects, which are based on the information currently available to us and on assumptions we have made. Although we believe that our plans, intentions, expectations, strategies and prospects as reflected in or suggested by those forward-looking statements are reasonable, we can give no assurance that the plans, intentions, expectations or strategies will be attained or achieved.
Our actual results may differ materially from those described in the forward-looking statements set forth in this Form 10-Q and will be affected by a variety of risks and factors that are beyond our control. Those risk factors and uncertainties include, without limitation, discussed under the heading “Risk Factors” in Item 1A of Part II of this Quarterly Report on Form 10-Q. The statements made in this Quarterly Report on Form 10-Q speak only as of the date stated herein, and subsequent events and developments may cause our expectations and beliefs to change. These forward-looking statements should not be relied upon as representing our views as of any date after the date stated herein. We undertake no obligation to revise or update any forward-looking statements, or to make any other forward-looking statements, whether as a result of new information, future events or otherwise.
“Ocera,” the Ocera logo, “Tranzyme,” “Tranzyme Pharma” and MATCH™ are trademarks or servicemarks of Ocera Therapeutics, Inc. All other trademarks are property of their respective owners.

Unless the context otherwise indicates, references in this report to the terms the "combined company", “Ocera”, “the Company”, “we”, “our” and “us” refer to Ocera Therapeutics, Inc. (formerly known as Tranzyme, Inc.) and its subsidiaries after the merger, described herein. The term “Private Ocera” refers to Ocera Subsidiary, Inc. (formerly known as Ocera Therapeutics, Inc.) prior to its merger with Terrapin Acquisition, Inc. a wholly-owned subsidiary of Tranzyme, Inc., which merger was consummated on July 15, 2013, as described elsewhere in this Quarterly Report on Form 10-Q. The term "Tranzyme", refers to Tranzyme, Inc. and its subsidiaries prior to the merger.





PART I - FINANCIAL INFORMATION

Item 1. Unaudited Financial Statements
Tranzyme, Inc.
Consolidated Balance Sheets
(Unaudited)
(In thousands, except share and per share amounts)
 
 
June 30, 2013
 
December 31, 2012
 
(unaudited)
 
 
Assets
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
8,614

 
$
15,319

Accounts receivable, net
143

 
152

Investment tax credits receivable, current portion
295

 
746

Prepaid expenses and other assets
285

 
369

Total current assets
9,337

 
16,586

Investment tax credits receivable
178

 

Furniture, fixtures and equipment, net
747

 
942

Total assets
$
10,262

 
$
17,528

Liabilities and stockholders’ equity
 

 
 

Current liabilities:
 

 
 

Accounts payable
$
492

 
$
1,678

Accrued liabilities
586

 
840

Current portion of deferred revenue

 
599

Total current liabilities
1,078

 
3,117

Other long-term liabilities
127

 
137

Total liabilities
1,205

 
3,254

Stockholders’ equity:
 

 
 

Preferred Stock, $.00001 par value; 5,000,000 shares authorized and no shares issued or outstanding at June 30, 2013 and December 31, 2012

 

Common Stock, $.00001 par value; 100,000,000 shares authorized as of June 30, 2013 and December 31, 2012; 2,300,036 shares issued and outstanding at June 30, 2013 and December 31, 2012

 

Additional paid-in capital
145,130

 
144,413

Accumulated other comprehensive loss
(738
)
 
(665
)
Accumulated deficit
(135,335
)
 
(129,474
)
Total stockholders’ equity
9,057

 
14,274

Total liabilities and stockholders’ equity
$
10,262

 
$
17,528

 
(See Notes to Consolidated Financial Statements)

1



Tranzyme, Inc.

Consolidated Statements of Operations and Comprehensive Loss
(Unaudited)
(In thousands, except share and per share amounts)
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2013
 
2012
 
2013
 
2012
Licensing and royalty revenue
$
893

 
$
1,340

 
$
1,492

 
$
2,783

Research revenue

 
1,071

 

 
2,236

Total revenue
893

 
2,411

 
1,492

 
5,019

Operating expenses:
 
 
 

 


 
 

Research and development
1,218

 
5,535

 
3,074

 
13,675

General and administrative
2,152

 
1,880

 
4,288

 
3,828

Total operating expenses
3,370

 
7,415

 
7,362

 
17,503

Operating loss
(2,477
)
 
(5,004
)
 
(5,870
)
 
(12,484
)
Interest expense, net
5

 
(624
)
 
7

 
(1,056
)
Other income (expense), net
4

 
19

 
2

 
(489
)
Net loss
$
(2,468
)
 
$
(5,609
)
 
$
(5,861
)
 
$
(14,029
)
Net loss per share— basic and diluted
$
(1.07
)
 
$
(2.74
)
 
$
(2.55
)
 
$
(6.84
)
Shares used to compute net loss per share— basic and diluted
2,300,036

 
2,050,657

 
2,300,036

 
2,050,382

 
 
 
 
 
 
 
 
Other comprehensive loss:
 
 
 
 
 
 
 
Net loss
$
(2,468
)
 
$
(5,609
)
 
$
(5,861
)
 
$
(14,029
)
Foreign currency translation adjustment
(33
)
 
(62
)
 
(73
)
 
(42
)
Comprehensive loss
$
(2,501
)
 
$
(5,671
)
 
$
(5,934
)
 
$
(14,071
)
 
(See Notes to Consolidated Financial Statements)

 

2



Tranzyme, Inc.

Consolidated Statements of Cash Flows
(Unaudited)
(In thousands, except share and per share amounts)
 
 
Six Months Ended
June 30,
 
2013
 
2012
Operating activities:
 

 
 

Net loss
$
(5,861
)
 
$
(14,029
)
Adjustments to reconcile net loss to net cash used in operating activities:
 

 
 

Depreciation
154

 
168

  Recognition of deferred revenue
(599
)
 
(2,644
)
  Loss on extinguishment of debt

 
520

Share-based compensation expense
717

 
599

Non-cash interest expense

 
233

Changes in operating assets and liabilities:
 

 
 

Accounts receivable and investment tax credits
245

 
672

Prepaid expenses and other assets
46

 
275

Accounts payable
(1,169
)
 
703

Accrued liabilities
(195
)
 
537

Net cash used in operating activities
(6,662
)
 
(12,966
)
 
 
 
 
Investing activities:
 

 


Purchases of furniture, fixtures, and equipment

 
(69
)
Net cash used in investing activities

 
(69
)
 
 
 
 
Financing activities:
 

 
 

Repayment of debt

 
(4,934
)
Proceeds from issuance of notes payable

 
13,434

Proceeds from the exercise of common stock options

 
38

Net cash provided by financing activities

 
8,538

Effect of exchange rate changes on cash
(43
)
 
(46
)
Net decrease in cash and cash equivalents
(6,705
)
 
(4,543
)
Cash and cash equivalents at beginning of period
15,319

 
40,930

Cash and cash equivalents at end of period
$
8,614

 
$
36,387

 
(See Notes to Consolidated Financial Statements)

 

3



Tranzyme, Inc.

Notes to Consolidated Financial Statements
June 30, 2013
(Unaudited)
 
1. Description of Business and Basis of Presentation
 
Description of Business

On July 15, 2013, Terrapin Acquisition, Inc., a Delaware corporation (“Merger Sub”), a wholly owned subsidiary of Tranzyme, Inc., a Delaware corporation (“Tranzyme”), completed its merger (the “Merger”) with and into Ocera Therapeutics, Inc., a privately held Delaware corporation focused on the development and commercialization of therapeutic products for patients with liver diseases, an unmet medical need (“Private Ocera”), with Private Ocera surviving the Merger. The Merger was effected pursuant to an Agreement and Plan of Merger and Reorganization (the “Merger Agreement”), dated as of April 23, 2013, by and among Tranzyme, Private Ocera and Merger Sub. Prior to the Merger, on July 15, 2013, Tranzyme effected a 12 -to-1 reverse stock split on its issued and outstanding common stock. The accompanying financial statements and notes to financial statements give retroactive effect to the reverse stock split for all periods presented.
 
At the effective time of the Merger, each outstanding share of Private Ocera's common stock converted into the right to receive approximately 0.11969414 shares of Tranzyme's common stock. In addition, each outstanding option to purchase Private Ocera's common stock and warrant to purchase Private Ocera's common stock, prior to the effective time of the Merger, was converted into an option or warrant to purchase Tranzyme's common stock. No fractional shares of Tranzyme's common stock were issued in connection with the Merger. Instead, Private Ocera stockholders received cash in lieu of any fractional shares of Tranzyme's common stock such stockholders would have otherwise been entitled to receive in accordance with the Merger Agreement.
Immediately following the Merger, the company changed its name from “Tranzyme, Inc.” to “Ocera Therapeutics, Inc.” The combined company following the Merger may be referred to herein as “the combined company”, “Ocera”, “we”, “our” “us” or the “Company”.
Except as described in Note 7 “Subsequent Events”, the accompanying unaudited consolidated financial statements do not give effect to the Merger. The financial statements have been labeled Tranzyme, Inc. for the purposes of this filing, which was the entity name in effect for the historical periods presented.

Prior to the Merger, Tranzyme, Inc. and its wholly-owned subsidiary, Tranzyme Pharma Inc., a Quebec, Canadian-based biopharmaceutical company (“Tranzyme Pharma”), focused on discovering, developing and commercializing novel, mechanism-based therapeutics.

The Company's business is subject to significant risks consistent with biopharmaceutical companies seeking to develop technologies and product candidates for human therapeutic use. These risks include, but are not limited to, uncertainties regarding research and development, access to capital, obtaining and enforcing patents, receiving regulatory approval and competition with other biotechnology and pharmaceutical companies.

Basis of Presentation
 
The consolidated financial statements include the accounts of Tranzyme and its subsidiary, Tranzyme Pharma. All significant intercompany balances and transactions have been eliminated. All amounts included in these notes to consolidated financial statements are reported in U.S. dollars, unless otherwise indicated.
 
Tranzyme's operations since inception have consisted primarily of organizing the company, conducting research and development including clinical trials and securing financing. In December 2009, Tranzyme entered into its first revenue generating collaboration agreement consistent with Tranzyme's business objectives and emerged from the development stage. As of June 30, 2013 , Tranzyme had incurred losses since inception of $135.3 million .
    
Going Concern
    
Tranzyme's financial statements have been prepared on a basis that assumes that Tranzyme will continue as a going concern and that contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course

4



of business. Tranzyme has incurred losses since its inception, expects to incur additional costs and requires additional capital to continue as a going concern. As a result, Tranzyme will require additional funds and will continue to seek private or public equity, debt financing, research funding and revenue or expense sharing from collaborative agreements to meet its capital requirements. Even if Tranzyme does not have an immediate need for additional cash, it may seek access to the private or public equity markets if and when conditions are favorable. If such funds are not available, management may need to reassess its business plans. There is no assurance that such additional funds will be available for Tranzyme to finance its operations on acceptable terms, if at all. As a result, there exists substantial doubt about Tranzyme's ability to continue as a going concern. Tranzyme's financial statements do not include any adjustments to reflect the possible future effects of recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty.

Immediately following the consummation of the Merger, the combined company raised approximately $20 million in cash from the sale of shares of the combined company's common stock to certain former stockholders of Private Ocera. See Note 7. The Company expects to continue to incur losses and requires additional financial resources to advance its products to either commercial stage or liquidity events.

2. Summary of Significant Accounting Policies
 
Unaudited Financial Statements
 
The accompanying balance sheet as of June 30, 2013 , statements of comprehensive income for the three and six months ended June 30, 2013 and 2012 and cash flows for the six months ended June 30, 2013 and 2012 are unaudited. These unaudited financial statements have been prepared in accordance with the rules and regulations of the United States Securities and Exchange Commission (“SEC”) for interim financial information. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles ("GAAP") for complete annual financial statements. These financial statements should be read in conjunction with the audited financial statements and the accompanying notes for the year ended December 31, 2012 contained in Tranzyme's Annual Report on Form 10-K filed with the SEC on March 28, 2013. The unaudited interim financial statements have been prepared on the same basis as the annual financial statements and, in the opinion of management, reflect all adjustments (consisting of normal recurring adjustments) necessary to state fairly the Tranzyme's financial position as of June 30, 2013 , and the results of operations for the three and six month periods ended June 30, 2013 and 2012 and cash flows for the six month periods ended June 30, 2013 and 2012. The December 31, 2012 balance sheet included herein was derived from audited financial statements, but does not include all disclosures including notes required by GAAP for complete annual financial statements.
 
The financial data and other information disclosed in these notes to the financial statements related to the three and six month periods ended June 30, 2013 and 2012 are unaudited. Interim results are not necessarily indicative of results for an entire year.
 
Investment Tax Credits Receivable
 
Tranzyme participates in government assistance programs in Quebec, Canada that provide refundable investment tax credits for certain research and development expenditures. The receivable represents management’s estimate of amounts expected to be recovered and is subject to adjustment based upon audit by Canadian taxation authorities. Tranzyme reported investment tax credits receivable using the flow-through method of $473,000 and $746,000 as of June 30, 2013 and December 31, 2012, respectively.
 
Revenue Recognition
 
Tranzyme's revenues generally consist of licensing and royalty revenue and fees for research services from license or collaboration agreements. Tranzyme recognizes revenues when all four of the following criteria are met: (1) persuasive evidence that an arrangement exists; (2) delivery of the products and/or services has occurred; (3) the selling price is fixed or determinable; and (4) collectability is reasonably assured. Royalty revenue is recognized in licensing and royalty revenue as applicable licensed products are sold.
 
For arrangements that include multiple deliverables, Tranzyme identifies separate units of accounting if certain separation criteria are met in accordance with ASC Topic 605-25, Multiple Element Arrangements . This evaluation requires subjective determinations and requires management to make judgments about the fair value of the individual elements and whether such elements are separable from the other aspects of the contractual relationship. If Tranzyme determines they are separable, Tranzyme will recognize revenue separately for each unit. If management determines the arrangement constitutes a single unit of accounting, revenue will be recognized as a combined unit for the entire arrangement. The consideration for the

5



arrangement is allocated to the separate units of accounting based on their relative fair values. Applicable revenue recognition criteria are considered separately for each unit of accounting. Tranzyme typically receives upfront, nonrefundable payments when licensing its intellectual property in conjunction with a research and development agreement. Management believes that these payments generally are not separable from the activity of providing research and development services because the license does not have stand-alone value separate from the research and development services that Tranzyme provides under applicable agreements. Accordingly, Tranzyme accounts for these elements as one unit of accounting and recognizes upfront, nonrefundable payments as licensing and royalty revenue on a straight-line basis over its contractual or estimated performance period, which is typically the term of its research and development obligations. As a result, Tranzyme is often required to make estimates regarding drug development timelines for compounds being developed pursuant to a strategic collaboration agreement. Amounts received in advance of services performed are recorded as deferred revenue until earned.
 
Tranzyme's strategic collaboration agreements may also contain non-refundable payments. Revenue for non-refundable payments based on the achievement of collaboration milestones beginning January 1, 2011 is recognized in accordance with ASC 605, Subtopic 28, Milestone Method , or ASC 605-28. Under ASC 605-28, a milestone payment is recognized as revenue when the applicable event is achieved if the event meets the definition of a milestone and the milestone is determined to be substantive. ASC 605-28 defines a milestone event as an event having all of the following characteristics: (1) there is substantive uncertainty regarding achievement of the milestone event at the inception of the arrangement; (2) the event can only be achieved based, in whole or in part, on either Tranzyme's performance or a specific outcome resulting from Tranzyme's performance; and (3) if achieved, the event would result in additional payment due to Tranzyme. A milestone is considered substantive if it meets all of the following criteria: (1) the payment is commensurate with either Tranzyme's performance to achieve the milestone or with the enhancement of the value of the delivered item; (2) the payment relates solely to past performance; and (3) the payment is reasonable relative to all of the deliverables and payment terms within the arrangement. If any of these conditions is not met, the milestone payment is deferred and recognized on a straight-line basis over a period determined as discussed above.

Tranzyme's collaboration agreements may also include payment for research and development services provided by Tranzyme on a contractual rate and direct expense basis. Tranzyme's records such payments as revenue in accordance with the agreements when Tranzyme acts as principal in the transaction. In addition, certain of Tranzyme's collaboration agreements contain cost-sharing provisions for development activities. Reimbursable amounts received under these cost sharing provisions are reflected as a reduction of research and development expense.
 
Research and Development Costs
 
Research and development costs are expensed as incurred. Research and development expenses include personnel costs associated with research and development activities including non-cash share-based compensation, costs for third-party contractors to perform research, conduct clinical trials and prepare drug materials, research supplies and facilities costs. Tranzyme accrues for costs incurred by external service providers, including contract research organizations and clinical investigators, based on its estimates of service performed and costs incurred. These estimates include the level of services performed by the third parties, patient enrollment in clinical trials, administrative costs incurred by the third parties, and other indicators of the services completed. Based on the timing of amounts invoiced by service providers, Tranzyme may also record payments made to those providers as prepaid expenses that will be recognized as expense in future periods as the related services are rendered.

Income Taxes

  Income taxes are computed using the asset and liability approach, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in Tranzyme's financial statements or tax returns. In estimating future tax consequences, Tranzyme generally considers all expected future events other than enactment of changes in tax law or rates. If it is more likely than not that some or all of a deferred tax asset will not be realized, Tranzyme records a valuation allowance.
    
      Share-based Compensation

  Share-based awards, including stock options, are recorded at their fair value as of the grant date and recognized to expense on a straight-line basis over the employee's requisite service period, which is generally the vesting period of the award. Share-based compensation expense is based on awards ultimately expected to vest, and therefore the recorded expense includes an estimate of future forfeitures. Forfeitures are to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The measurement of nonemployee share-based compensation is subject to periodic adjustments as the underlying equity instruments vest and is recognized as an expense over the period over which

6



services are received. Tranzyme estimates the fair value of share-based awards to employees, directors and non-employees using the Black-Scholes option-valuation model. The Black-Scholes model requires the input of subjective assumptions, including volatility, the expected term and the fair value of the underlying common stock on the date of grant, among other inputs.

Fair Value
 
Tranzyme's financial instruments consist principally of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities. The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate their fair values due to the short-term nature of such instruments as of June 30, 2013 and December 31, 2012. Fair value measurements are classified and disclosed in one of the following three categories:
 
Level 1 —Quoted prices in active markets for identical assets or liabilities.
 
Level 2 —Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
 
Level 3 —Unobservable inputs that are supported by little or no market activity and are significant to the fair value of the assets or liabilities.
 
Foreign Currency Translation
Tranzyme's consolidated financial statements are presented in U.S. dollars. The financial statements of Tranzyme Pharma are re-measured from the local currency to U.S. dollars, as follows: monetary assets and liabilities are translated at the exchange rate in effect at the balance sheet date and non-monetary items at exchange rates in effect when the assets were acquired or non-monetary liabilities incurred. Revenue and expenses are translated at the average exchange rates prevailing during the period of the transaction. The gains and losses resulting from the translation of foreign currency financial statements into U.S. dollars are reported in accumulated other comprehensive income (loss) and are presented in the consolidated statements of comprehensive income and statements of stockholders' deficit.

Recent Accounting Pronouncements
 
Occasionally, new accounting standards are issued or proposed by the Financial Accounting Standards Board (the "FASB"), or other standards-setting bodies that Tranzyme adopts by the effective date specified within the standard. Unless otherwise discussed, standards that do not require adoption until a future date are not expected to have a material impact on Tranzyme financial statements upon adoption.

Other Comprehensive Income

In February 2013, the FASB issued a final rule related to the reporting of amounts reclassified out of accumulated other comprehensive income that requires entities to report, either on their income statement or in a footnote to their financial statements, the effects on earnings from items that are reclassified out of other comprehensive income. The new accounting rules was effective for Tranzyme in the first quarter of 2013. The adoption of the new accounting rules did not have a material effect on Tranzyme's financial condition, results of operations or cash flows. Tranzyme chose to present the total of comprehensive income, the components of net income, and the components of other comprehensive income in a single continuous statement of operations and comprehensive income.

3. Net Loss per Share

  Basic net loss per share is calculated by dividing the net loss by the weighted average number of shares of Tranzyme's common stock outstanding for the period, without consideration for common stock equivalents. Diluted net loss per share is computed by dividing the net loss by the weighted average number of common share equivalents outstanding for the period determined using the treasury-stock method. Under the treasury-stock method earnings per share data is computed as if the common share equivalents were outstanding at the beginning of the period (or at the time of issuance, if later) and as if the funds obtained from exercise of the common stock equivalents were used to purchase common stock at the average market price during the period. If there is little or no market for the common stock, a reasonable estimate of fair value shall be used.

7



For purposes of this calculation, preferred stock, stock options and warrants to purchase capital stock are considered to be common stock equivalents and are only included in the calculation of diluted net loss per share when their effect is dilutive.
    
The following table sets forth the computation of basic and diluted net loss per share in thousands, except share and per share data:
 
 
Three Months Ended
June 30,
Six Months Ended
June 30,
 
2013

2012
2013
 
2012
Historical
 

 
 

 

 
 

Numerator:
 

 
 

 

 
 

Net loss
$
(2,468
)
 
$
(5,609
)
$
(5,861
)
 
$
(14,029
)
Denominator:
 

 




 


Weighted average common shares outstanding
2,300,036

 
2,050,657

2,300,036

 
2,050,382

Net loss per share— basic and diluted
$
(1.07
)
 
$
(2.74
)
$
(2.55
)
 
$
(6.84
)
 
Potentially dilutive securities not included in the calculation of diluted net loss per common share because to do so would be anti-dilutive are as follows (in common equivalent shares on a weighted-average basis):
 
 
Three Months Ended
June 30,
Six Months Ended
June 30,
 
2013
 
2012
2013
 
2012
Common stock options
220,392

 
207,530

227,851

 
202,922

Common stock warrants
19,243

 
19,243

19,243

 
16,938

 
4. Strategic Collaboration and License Agreements
 
Norgine B.V.
 
In June 2010, Tranzyme entered into a collaboration agreement with Norgine B.V. ("Norgine") to develop and commercialize Tranzyme's product candidate, ulimorelin , in a licensed territory that included Europe, Australia, New Zealand, Middle East, North Africa and South Africa. Under the terms of the agreement, Tranzyme received a nonrefundable, upfront payment of $8.0 million . The licensing fee was deferred and was being amortized on a straight-line basis over a period of 31  months, through December 31, 2012, which represented the estimated period of time over which Tranzyme's involvement in the core development phase of the collaboration is a substantive performance obligation.

On July 19, 2012, Tranzyme received notice of termination of its collaboration and license agreement with Norgine which became effective on October 19, 2012. All rights and licenses granted under the agreement by Tranzymey to Norgine terminated and reverted to Tranzyme as of the effective date of the termination and Tranayme incurred no termination penalties.

Tranzyme recognized $823,000 and $1.6 million of the upfront fee as licensing revenue for the three and six month periods ended June 30, 2012, respectively. As of June 30, 2013 all deferred revenue recognized under the agreement had been fully amortized. In addition, Tranzyme recognized a reduction in research and development expenses of $88,000 as a result of reimbursement for cost-sharing activities under this agreement for the six month period ended June 30, 2013. Tranzyme recognized an increase in research and development expenses of $133,000 and $49,000 as a result of payments due Norgine for cost-sharing activities for the three and six month periods ended June 30, 2012, respectively.
    
Bristol-Myers Squibb Company

In December 2009, Tranzyme entered into a two-year collaboration agreement with Bristol-Myers Squibb Company ("BMS") to discover, develop and commercialize novel macrocyclic compounds, other than Tranzyme's product candidates and internal programs, directed against a limited number of targets of interest to BMS. Under the terms of the agreement, BMS funded Tranzyme's lead discovery efforts on these targets and is primarily responsible for optimizing the identified lead compounds. BMS will be solely responsible for preclinical and clinical development of all products arising from the collaboration and for their commercialization globally. In connection with the agreement, Tranzyme received an upfront license fee of $10.0 million and the Company may receive up to approximately $80.0 million in additional development milestone

8



payments, and $30.0 million in sales milestone payments, for each target program if development and regulatory milestones, or commercial milestones, respectively, are achieved. In addition, the Company would receive graduated single-digit percentage royalties and sales milestone payments on annual net sales of commercial products.

The upfront licensing fee was deferred and was initially being amortized on a straight-line basis over a period of 30  months, which represented the estimated period of time over which Tranzyme's involvement in the collaboration is a substantive performance obligation or deliverable. The research program term was to expire in December 2011; however, in September 2011, the research collaboration was extended by BMS for a six-month period through June 2012. As a result of the extension, Tranzyme reassessed the period of time over which Tranzyme's involvement in the collaboration represents a substantive performance obligation or deliverable and changed the amortization period for the remaining deferred upfront licensing fee from 30 months to 36 months. In April 2012, the research collaboration was further extended by BMS for a three-month period through September 2012 and Tranzyme changed the amortization period for the remaining deferred upfront licensing fee from 36 months to 39 months. In September 2012, the research collaboration was further extended by BMS for a three-month period through December 2012 and Tranzyme changed the amortization period for the remaining deferred upfront licensing fee from 39 months to 42 months.

The agreement provided for up to $6.0 million in research funding, payable in quarterly installments, over the initial two -year research program to support personnel related expenses, laboratory supplies and equipment to support the discovery efforts. BMS provided $2.5 million in research funding during the six -month extension period ending June 30, 2012 and provided $600,000 in funding during the three -month extension period ending September 30, 2012. BMS provided an additional $375,000 in funding for the three -month extension period ending December 31, 2012. Revenue for development services provided under the agreement was recognized as earned where Tranzyme acted as principal in the transaction.

On January 4, 2013, Tranzyme announced the successful completion of its chemistry-based drug discovery collaboration with BMS. As a result of the joint research efforts, Tranzyme has transferred compounds to BMS for further development across multiple drug targets.
The following is Tranzyme's revenue for the BMS collaboration for the periods indicated (in thousands):
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2013
 
2012
 
2013
 
2012
Licensing revenue
$
300

 
$
428

 
$
599

 
$
999

Research revenue

 
1,071

 

 
2,236

Total
$
300

 
$
1,499

 
$
599

 
$
3,235

 
Open Biosystems, Inc.
 
In October 2005, Tranzyme entered into a license and marketing agreement whereby Open Biosystems, Inc. acquired a worldwide royalty-bearing license to certain intellectual property unrelated to Tranzyme's product candidates and Macrocyclic Template Chemistry (MATCH) drug discovery technology, as specified in the agreement. Tranzyme earns royalties on annual net sales at rates that vary by licensed product category as defined in the agreement or, through 2010, minimum annual royalties, if greater than earned royalties, until the expiration date of the last-to-expire licensed patent or twelve years , whichever occurs last. Royalty revenue recognized from the licensing agreement was $45,000 and $79,000 for the three month periods ended June 30, 2013 and 2012, respectively. Royalty revenue recognized from the licensing agreement was $96,000 and $128,000 for the six month periods ended June 30, 2013 and 2012, respectively. 

Material Transfer Agreements

During the six month period ended June 30, 2013, Tranzyme entered into two Material Transfer Agreements and billed approximately $798,000 of nonrefundable payments upon transfer of material to the third parties.  Neither Tranzyme nor the third parties have any obligation beyond the delivery of materials and payment, therefore all the revenue was recognized upon completion of the material transfers during the six month period ended June 30, 2013.  


5. Notes Payable and Other Liabilities
 
2010 Notes Payable

9



 
On September 30, 2010, Tranzyme entered into a loan and security agreement with two lenders for a total commitment of $13.0 million . On October 1, 2010, the parties executed the related note agreements (the "2010 Notes") and Tranzyme repaid outstanding principal and interest of $3.4 million on previously outstanding notes. The 2010 Notes carried an interest rate equal to 10.75% per annum and were to mature on January 1, 2014. The 2010 Notes were payable in nine installments of interest only followed by thirty installments of principal plus interest. Principal payments on the 2010 Notes commenced in August 2011. In connection with the 2010 loan and security agreement, Tranzyme issued warrants to purchase an aggregate of $520,000 in stock of Tranzyme, which were contingently exercisable for a class and series of shares and exercise price as determined by future events as specified in the agreement.  Upon the closing of Tranzyme's IPO in 2011, the warrants became exercisable for shares of Tranzyme's common stock. Ttanzyme determined the fair value of the warrants to be $254,000 and recorded the warrant as a liability with a related debt discount to be amortized as interest expense over the term of the 2010 Notes.

    Tranzyme recognized $20,000 in interest expense, including the amortization of the warrants, for the six month period ended June 30, 2012. Tranzyme recognized no interest expense for the three or six month period ended June 30, 2013.

2012 Notes Payable

On January 31, 2012, Tranzyme entered into an Amended and Restated Loan and Security Agreement (the "2012 Notes") with the holders of the 2010 Notes whereby the lenders provided Tranzyme with approximately $13.4 million of new proceeds, of which $4.1 million was used to repay a portion of the outstanding principal on the 2010 Notes. The interest rate on all of the outstanding notes was reset to 10.0% per annum. Tranzyme would have made interest only payments through February 1, 2013, and then would have made 30 monthly principal and interest payments through August 1, 2015, to fully amortize the loan. In addition, the approximately $6.6 million of 2010 Notes that were reissued under the 2012 Notes were reamortized to follow the same interest-only period followed by the same 30 monthly principal and interest payments.

    Tranzyme reported this transaction as an extinguishment of debt based on an assessment that the repayment and exchange of debt instruments were on substantially different terms. At the date of the transaction, Tranzyme recognized a loss on extinguishment of $520,000 included in other expense in the consolidated income statement through the six months ended June 30, 2012. During the third quarter of 2012, Tranzyme subsequently determined that this transaction did not represent an extinguishment of debt but instead was a modification of the terms of the 2010 Notes which was accounted for prospectively. As a result, approximately $257,000 was reclassified to interest expense and $263,000 to other balance sheet deferred charges. The impact of this change is entirely non-cash and did not have a material impact on Tranzyme's balance sheet or reported net loss and cash flows for any interim period during 2012.

In connection with the 2012 Notes, Tranzyme issued warrants to purchase an aggregate of 163,488 shares of its common stock at an exercise price of $3.67 per share. The warrants are immediately exercisable, and excluding certain mergers or acquisitions, will expire on January 30, 2022. Tranzyme determined the fair value of the warrants to be $527,000 using the Black-Scholes pricing model and recorded the warrants as a debt discount to be amortized as interest expense over the term of the 2012 Notes using the effective interest rate method.

On December 4, 2012, Tranzyme repaid all principal and interest under the 2012 Notes and made aggregate final payments including principal and interest of approximately $21.0 million to the lenders. Tranzyme determined that the early prepayment of the 2012 Notes resulted in an extinguishment of debt instruments resulting in a $1.4 million loss on extinguishment of debt reflected in other expense for the year ended December 31, 2012.

Tranzyme recognized $629,000 and $ 1.0 million in interest expense, including the amortization of the warrants and debt issuance costs, for the three and six month period ended June 30, 2012. Tranzyme recognized no interest expense for the three or six month periods ended June 30, 2013.

6. Equity Transactions
 
Warrants

As of June 30, 2013 the following warrants to purchase common stock were outstanding:


10



Issuance Date
Shares
Exercise Price
Expiration
12/3/2008
2,380

$84.00
12/3/2015
9/30/2010
3,240

$160.44
4/6/2016
1/31/2012
13,623

$44.04
1/31/2022
Total warrants outstanding
19,243

 
 

Share-based Compensation
 
The following summarizes shares outstanding, exercisable and available for grant under Tranzyme's equity compensation plan as of June 30, 2013 :
 
 
Shares Outstanding
 
Shares
Exercisable
 
Weighted Average
Exercise Price of
Shares Outstanding
Total Shares outstanding as of June 30, 2013
217,115

 
118,678

 
$
44.52

Total shares issued upon exercise of options
4,548

 
 
 
 
Total shares authorized
302,288

 
 
 
 
Total shares available for grant as of June 30, 2013
80,625

 
 
 
 

A total of 29,679 options were forfeited during the six months ended June 30, 2013.
The exercise price of stock options is equal to the closing market price of the underlying common stock on the grant date. The weighted-average assumptions used in the Black-Scholes valuation model for equity awards granted during the six month period ended June 30, 2012 are shown in the table below. No stock options were issued for the three or six month period ended June 30, 2013.
 
 
 
Six Months Ended
June 30,
 
 
2013
2012
Expected volatility
 
%
76.1
%
Expected dividends
 


Expected life
 

6.25

Risk-free interest rate
 
%
1.38
%
 
Tranzyme determines the options’ life based upon the use of the simplified method.  As a newly public company, sufficient history to estimate the volatility and dividend yield of our common stock is not available.  Tranzyme uses a pool of comparable companies as a basis for the expected volatility assumption and dividend yield.  Tranzyme intends to continue to consistently apply this process using the comparable companies until sufficient amount of historical information becomes available. The risk free interest rate is based upon the yield of an applicable Treasury instrument.
 

Tranzyme recognized non-cash share-based compensation expense to employees in its research and development and selling, general and administrative functions as follows:
 
 
Three Months
Ended June 30,
Six Months
Ended June 30,
 
2013
2012
2013
2012
Research and development
$
127,000

$
89,000

$
252,000

$
158,000

General and administrative
249,000

219,000

465,000

441,000

Total
$
376,000

$
308,000

$
717,000

$
599,000


7. Subsequent Events     
    

11



Completion of Merger
    
On July 15, 2013, Tranzyme completed the Merger with Private Ocera merging with Merger Sub. The Merger was effected pursuant to the Merger Agreement. Private Ocera is a clinical stage biopharmaceutical company focused on the development and commercialization of therapeutic products for patients with liver diseases an unmet medical need. The combined company's lead drug candidate is OCR-002, an ammonia scavenger designed to treat patients with acute and chronic liver disease. The Merger will be accounted for as a reverse merger under the acquisition method of accounting. Under the acquisition method of accounting, Private Ocera will be treated as the accounting acquiror and Tranzyme will be treated as the “acquired” company for financial reporting purposes because, immediately upon completion of the Merger, Private Ocera stockholders, prior to the Merger, held a majority of the voting interest of the combined company. The total purchase price for Tranzyme was approximately $15.0 million and will be allocated to identifiable tangible and intangible assets existing as of July 15, 2013 with any residual amount recorded as goodwill.

Prior to the Merger, on July 15, 2013, Tranzyme effected a 12 -to-1 reverse stock split on its issued and outstanding common stock. Pursuant to the terms of the Merger Agreement, each outstanding share of Private Ocera common stock was converted into approximately 0.11969414 shares of Tranzyme's common stock (the “Exchange Ratio”). In addition, upon closing of the Merger: (i) all outstanding options to purchase shares of Private Ocera's common stock were assumed by Tranzyme and converted into options to purchase shares of Tranzyme's common stock, in each case appropriately adjusted based on the Exchange Ratio; and (ii) all outstanding warrants to purchase shares of Private Ocera's common stock were assumed by Tranzyme and converted into warrants to purchase shares of Tranzyme's common stock, in each case appropriately adjusted based on the Exchange Ratio. No fractional shares of Tranzyme's common stock were issued in connection with the Merger. Instead, Private Ocera's stockholders received cash in lieu of any fractional shares of Tranzyme common stock that such stockholders would otherwise have been entitled to receive in connection with the Merger. Also, as a result of the reverse stock split, the per share exercise price of, and the number of shares of common stock underlying, the combined company's stock options and warrants outstanding prior to the reverse stock split were automatically proportionally adjusted based on the 12-to-1 reverse stock split ratio in accordance with the terms of such options, warrants. The reverse stock split did not alter the par value of the Tranzyme's common stock or modify any voting rights or other terms of the common stock.

Also in connection with the completion of the Merger, Tranzyme changed its name from “Tranzyme, Inc.” to “Ocera Therapeutics, Inc.”
Unregistered Sales of Equity Securities

On April 23, 2013, concurrently with the execution of the Merger Agreement, Tranzyme entered into a Securities Purchase Agreement (the “Financing Agreement”) with certain Private Ocera stockholders and their affiliates. Pursuant to the Financing Agreement, immediately following the consummation of the Merger, the Company sold approximately $20 million of its Common Stock (the “Financing”) to the parties at a per share purchase price of $6.0264 . Concurrently with the execution of the Financing Agreement, Tranzyme entered into a Registration Rights Agreement that granted customary registration rights to the participants in the Financing.

After giving effect to the Merger and the Financing, the Company had 11,287,943 shares of common Stock outstanding.
    

12



Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
You should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and related notes included in our Annual Report on Form 10-K, as well as the information relating to such audited financial statements contained under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Annual Report on Form 10-K, which includes annual financial statements as of and for the year ended December 31, 2012 as well as our subsequent reports filed with the SEC and other publicly available information. 

Unless otherwise indicates, references to the terms the "combined company”, “Ocera”, the "Company”, “we”, “our” and “us” refer to Ocera Therapeutics, Inc. (formerly known as Tranzyme, Inc.) and its subsidiaries after the merger described herein. The term “Private Ocera” refers to Ocera Subsidiary, Inc. (formerly known as Ocera Therapeutics, Inc.) prior to its merger with Terrapin Acquisition, Inc. a wholly-owned subsidiary of Tranzyme, Inc. The term "Tranzyme" refers to the Tranzyme, Inc. and its subsidiaries prior to the merger.


Overview
     
Introduction
    We are a clinical stage biopharmaceutical company focused on the development and commercialization of novel therapeutics for patients with acute and chronic liver diseases, an area of high unmet medical need. Our lead program, OCR-002, is an ammonia scavenger, designed to treat hyperammonemia (elevated ammonia in the blood) and associated hepatic encephalopathy, a complication of patients with liver cirrhosis. We licensed the compound from University College London Business PLC in 2008. OCR-002 has received Orphan Drug designation and Fast Track status from the U.S. Food and Drug Administration, or FDA, for the treatment of hyperammonemia and associated hepatic encephalopathy, or HE, in patients with liver cirrhosis, acute liver failure and acute liver injury. We have completed Phase 1 and 2a studies in both healthy volunteers and patients with liver cirrhosis using the IV formulation of OCR-002. These studies established safety, tolerability and target dose for OCR-002.
In addition, OCR-002 is the subject of two ongoing, externally-sponsored Phase 2a studies. The first of these studies is evaluating OCR-002 in patients with known liver cirrhosis and elevated ammonia due to upper gastrointestinal bleeding, or UGIB. UGIB is a complication of liver cirrhosis, and often leads to acute HE. The open label phase of this study demonstrated that OCR-002 provides rapid and durable ammonia reduction within 36 hours of treatment. The second part of this study, a double-blind, placebo-controlled study to measure ammonia plasma concentration and improvement in HE is currently enrolling. Data from this study is expected in 2014.
The second externally sponsored Phase 2a study is with the Acute Liver Failure Study Group (ALFSG), funded by the National Institutes of Health. The ALSFG is studying OCR-002 for the treatment of patients with acute liver injury and acute liver failure due to acetaminophen overdose. We are currently planning to initiate a Phase 2b, randomized, double-blind, placebo-controlled, efficacy study of OCR-002 as a treatment for acute hepatic encephalopathy in hospitalized patients with liver cirrhosis. The study is expected to have approximately 200 patients, and is expected to begin in late 2013.
In addition to OCR-002, we have developed Zysa™ (AST-120) a spherical carbon adsorbent, for the treatment of irritable bowel syndrome. We licensed the compound from Kureha Corporation in 2005. In March 2012, Private Ocera received CE Mark for the sale of AST-120 as a medical device for the treatment of diarrhea predominant irritable bowel syndrome (d-IBS) in the European Market. We are currently evaluating strategic options for the commercialization of this product.
    
Recent Developments

On July 15, 2013, Tranzyme, Inc., or Tranzyme, completed its merger, or the Merger, with Ocera Therapeutics, Inc., a privately held Delaware corporation focused on the development, and commercialization of therapeutic products for patients with liver diseases, an unmet medical need, or Private Ocera, in accordance with the terms of the Agreement and Plan of Merger and Reorganization, dated as of April 23, 2013, or the Merger Agreement, by and among Tranzyme, Private Ocera and Terrapin Acquisition, Inc., a wholly-owned subsidiary of Tranzyme, or the Merger Subsidiary. Pursuant to the Merger Agreement, Merger Subsidiary merged with and into Private Ocera, with Private Ocera, renamed as Ocera Subsidiary, Inc., surviving the merger as a wholly-owned subsidiary of the combined company.
Prior to the Merger, on July 15, 2013, Tranzyme effected a 12-to-1 reverse stock split on its issued and outstanding common stock. Upon the closing of the Merger, each outstanding share of Private Ocera's common stock converted into approximately 0.11969414 shares of Tranzyme's common stock. In addition, each outstanding option to purchase Private

13



Ocera's common stock and warrant to purchase Private Ocera's common stock prior to the effective time of the Merger was converted into an option or warrant to purchase Tranzyme's common stock. No fractional shares of Tranzyme's common stock were issued in connection with the Merger. Instead, Private Ocera's stockholders received cash in lieu of any fractional shares of Tranzyme's common stock such stockholders would have otherwise been entitled to receive in accordance with the Merger Agreement. Immediately following the Merger, the combined company changed its name from “Tranzyme, Inc.” to “Ocera Therapeutics, Inc.”

Immediately following the closing of the Merger, we sold approximately $20 million in shares of our common stock to the certain former stockholders of Private Ocera. In connection with the Financing, we entered into a Registration Rights Agreement that granted customary registration rights to the participants in the Financing. We intend to use the proceeds from the Financing to help fund a Phase 2b clinical trial for Ocera's OCR-002 product candidate, for working capital and general corporate purposes. The Merger will be accounted for as a reverse merger under the acquisition method of accounting. Under the acquisition method of accounting, Private Ocera will be treated as the accounting acquiror and Tranzyme will be treated as the “acquired” company for financial reporting purposes because, immediately upon completion of the Merger, Private Ocera stockholders, prior to the Merger, held a majority of the voting interest of the combined company. The total purchase price for Tranzyme was approximately $15.0 million and will be allocated to identifiable tangible and intangible assets existing as of July 15, 2013 with any residual amount recorded as goodwill.

Approximately 11.3 million shares of our common stock were outstanding as of July 15, 2013 following the consummation of the Merger and the Financing. The reverse stock split did not alter the par value of our common stock or modify any voting rights or other terms of our common stock.
The financial information included in this Management's Discussion and Analysis of Financial Condition and Results of Operations is that of Tranzyme prior to the Merger because the Merger was consummated after the period covered by the financial statements included in this Quarterly Reported on Form 10-Q. Accordingly, the historical financial information included in this Quarterly Report on Form 10-Q, unless otherwise indicated or as the context otherwise requires, is that of Tranzyme and its subsidiaries prior to the Merger.
Tranzyme Overview
Prior to the Merger, Tranzyme was a biopharmaceutical company focused on discovering, developing and commercializing novel, mechanism-based therapeutics. All of Tranzyme's drug discovery activities were based on its proprietary small molecule macrocyclic template chemistry (MATCH™) technology, which has also been successfully used to generate drug candidates in partnership with other pharmaceutical companies. MATCH enables the rapid construct of synthetic libraries of drug-like, macrocyclic compounds in a predictable and efficient manner.
Tranzyme was incorporated in Delaware on January 12, 1998. On December 17, 2003, Tranzyme entered into a business combination with Neokimia Inc., a Quebec, Canada-based chemistry company which now operates under the name Tranzyme Pharma Inc., or Tranzyme Pharma. Tranzyme Pharma is a wholly-owned subsidiary and owns substantially all of Tranzyme's intellectual property and conducts Tranzyme's preclinical research.
In May 2012, following the receipt of the results of the two Phase 3 trials, both of which failed to meet their primary and secondary endpoints, Tranzyme stopped development and regulatory activities for ulimorelin .
In December 2012, Tranzyme stopped enrollment and further clinical development of its product candidate TZP-102, being evaluated in diabetic patients with gastroparesis, following the results of two Phase 2b trials, both of which failed to show superiority over placebo.
Tranzyme has devoted substantially all of its resources to its drug discovery efforts which consist of research and development activities, clinical trials for its product candidates, the general and administrative support of these operations and intellectual property protection and maintenance. To date, Tranzyme has funded its operations principally through private placements of its common stock, preferred stock and convertible debt; bank and other lender financings; and through payments received under collaborative licensing arrangements with Norgine B.V., or Norgine, and Bristol-Myers Squibb Company, or BMS, raising an aggregate of approximately $140.0 million. In April 2011, Tranzyme completed an initial public offering, or IPO, of its common stock pursuant to a Registration Statement on Form S-1 (File No. 333-170749) raising an aggregate of $51.4 million in net proceeds. In September 2012, Tranzyme completed a follow-on offering of its common stock pursuant to a Registration Statement on Form S-3 (File No. 333-181215) raising an aggregate of $10.6 million in net proceeds.
Tranzyme has incurred significant losses since its inception. As of June 30, 2013, its accumulated deficit was approximately $135.3 million.



14



Strategic Partnerships
 
Norgine, B.V. In June 2010, Tranzyme entered into a license agreement with Norgine, a leading, GI-focused European specialty pharmaceutical company, to co-develop and commercialize ulimorelin in licensed territories that include Europe, Australia, New Zealand, Middle East, North Africa and South Africa. Under the terms of the agreement, Tranzyme received a nonrefundable, upfront license fee of $8.0 million. The $8.0 million nonrefundable up-front payment was deferred and was being recognized on a straight-line basis over 31 months, through December 31, 2012, the estimated period of time over which Tranzyme's involvement in the collaboration was a substantive performance obligation.
Under the agreement, Norgine shared the cost of our Phase 3 clinical trials and the cost of procuring clinical manufacturing supply for the trials. Each party was solely responsible for managing and covering the cost of regulatory filings in its own territories. In addition, each party was solely responsible for the cost of any special studies required for regulatory approval specific to its own territory. Costs for development services provided under the agreement were expensed as incurred. Reimbursement of expenses under this agreement were offset against costs as incurred.
In 2012, following the receipt of the results of Tranzyme's two Phase 3 trials, both of which failed to meet their primary and secondary endpoints, Tranzyme stopped development and regulatory activities for ulimorelin . On July 19, 2012, Tranzyme received notice of termination of the license agreement with Norgine. The termination became effective on October 19, 2012. As a result of the termination agreement, all rights and licenses granted under the agreement by Tranzyme to Norgine terminated and reverted to Tranzyme as of the effective date of the termination. Tranzyme incurred no termination penalties as result of the termination of the agreement.

Bristol-Myers Squibb Company . In December 2009, Tranzyme entered into a collaboration agreement with BMS to discover, develop and commercialize additional novel compounds discovered using Tranzyme's MATCH technology platform, other than Tranzyme's product candidates and internal programs, against a limited number of targets of interest to BMS. Under the terms of the agreement, BMS funded Tranzyme's early lead discovery efforts on these targets. BMS will be solely responsible for preclinical and clinical development of all product candidates arising from the collaboration and, if successful products are developed, for their commercialization globally. As part of the agreement, Tranzyme received a $10.0 million nonrefundable upfront license fee. The $10.0 million nonrefundable upfront license fee was deferred and was being recognized on a straight-line basis over thirty months, the estimated initial research and collaboration period of the agreement. In September 2011, BMS extended the collaboration agreement for an additional six-month period and Tranzyme changed the amortization period for the remaining unamortized upfront payment from 30 months to 36 months. In April 2012, BMS further extended the research collaboration for an additional three-month period through September 2012, and Tranzyme further extended the amortization period for the remaining upfront payment from 36 months to 39 months, through March 31, 2013, the estimated period of time over which Tranzyme's involvement in the collaboration is a substantive performance obligation. In September 2012, BMS further extended the research collaboration for an additional three-month period through December 2012, and Tranzyme further extended the amortization period for the remaining upfront payment from 39 months to 42 months, through June 30, 2013, the estimated period of time over which Tranzyme's involvement in the collaboration is a substantive performance obligation.
The agreement provided for up to $6.0 million in research funding, payable in quarterly installments, over the initial two-year research program to support personnel related expenses, laboratory supplies and equipment to support the discovery efforts. Up to $2.5 million in research funding was provided during the six-month extension period and $600,000 in funding was provided during the three-month extension period through September 30, 2012. Up to $375,000 in funding was provided during the three-month extension period through December 31, 2012. Tranzyme recognized revenue for reimbursement of research costs under this agreement of $2.2 million for the six month period ended June 30, 2012.
On January 4, 2013, Tranzyme announced the successful completion of its chemistry-based drug discovery collaboration with BMS. As a result of the joint research efforts, Tranzyme transferred compounds to BMS for further development across multiple drug targets. As part of the collaboration agreement, we may receive up to approximately $80.0 million in additional development milestone payments, and $30.0 million in sales milestone payments, for each target program if development and regulatory milestones, or commercial milestones, respectively, are achieved. In addition, we would receive graduated single- digit percentage royalties on sales of commercialized products. As of June 30, 2013, we have not received any milestone or royalty payments, and we are not certain if and when we will be eligible for such payments in the future.

Open Biosystems, Inc . In October 2005, Tranzyme entered into a license and marketing agreement whereby Open Biosystems, Inc. acquired a worldwide royalty-bearing license to certain of Tranzyme's intellectual property unrelated to Tranzyme's product candidates and MATCH drug discovery technology. The agreement provides for royalty revenue on annual net sales at rates ranging from mid-single digits to 20 percent based on sales by licensed product category or, through 2010, minimum annual royalties if greater than earned, until the expiration date of the last-to-expire licensed patent or 12

15



years, whichever occurs last. Tranzyme has recognized royalty revenue from this agreement of $45,000 and $79,000 for the three month periods ended June 30, 2013 and 2012, respectively, and $96,000 and $128,000 for the six month periods ended June 30, 2013 and 2012, respectively.

Financial Operations Overview
 
  Revenues
  Tranzyme's revenue consists primarily of licensing and royalty revenue as well as research revenue, which consists of fees for research services from license or collaboration agreements. The upfront licensing fees received pursuant to Tranzyme;s license agreements are deferred and are being recognized in licensing and royalty revenue on a straight-line basis over a period which represents the estimated period of time over which our involvement in the collaboration represents a substantive performance obligation. These fees under Tranzyme's collaboration agreement with BMS are being recognized over a 42 month period, through June 2013, the estimated period of time over which Tranzyme's involvement in the collaboration is a substantive performance obligation. Upfront licensing fees under Tranzyme's license agreement with Norgine were recognized over 31 months. Revenue for research services provided under Tranzyme's collaboration agreement with BMS is recognized in research revenue as such services are performed. Royalty revenue from Tranzyme's agreement with Open Biosystems, Inc. is recognized in licensing and royalty revenue as applicable products are sold.
In the future, we may generate revenue from product sales, upfront licensing fees and milestone payments from collaborations, and royalties from the sale of products commercialized under licenses of our intellectual property. We do not expect to generate any significant revenue unless or until we commercialize our product candidates or reach milestones contained in our collaboration agreements. We expect that our revenue will fluctuate from quarter to quarter as a result of the timing and amount of licensing and milestone payments received, research and development reimbursements for collaborative agreements, and other payments received from partnerships. If we fail to complete the development of our product candidates in a timely manner or obtain regulatory approval for them, our ability to generate future revenue from product sales and milestones payments or royalties from product sales may adversely affect our results of operations and financial position.
Research and Development
Tranzyme expenses research and development costs as they are incurred. Research and development expenses consist of expenses incurred in the discovery and development of Tranzyme's product candidates, and primarily include:

expenses, including salaries, benefits and non-cash share-based compensation expenses for research and development personnel;
expenses incurred under third party agreements with contract research organizations, or CROs, investigative sites and consultants in conducting clinical trials;
costs of acquiring and manufacturing clinical trial supplies;
costs associated with our discovery efforts and preclinical activities;
costs associated with non-clinical activities and regulatory submissions; and
costs associated with the maintenance and protection of our intellectual property.
Direct development expenses and certain indirect overhead expenses associated with Tranzyme's research and development activities are allocated to its product candidates. The allocation of indirect overhead is based on management's estimate of the use of such resources on a program-by-program basis. Indirect costs related to Tranzyme's research and development activities that are not allocated to a product candidate, including salaries and benefits for its clinical development personnel, and costs associated with the development of its preclinical product candidates and in support of its discovery collaboration are included in “Other research and development expenses” in the table below.
    
The following table presents our research and development expenses for the periods indicated (in thousands):
 
        
 
Three Months
Ended June 30,
 
Six Months
Ended June 30,
 
2013
 
2012
 
2013
 
2012
ulimorelin
$
1

 
$
905

 
$
1

 
$
4,362

TZP-102
5

 
2,614

 
649

 
5,197

Other research and development expenses
1,212

 
2,016

 
2,424

 
4,116

 
$
1,218

 
$
5,535

 
$
3,074

 
$
13,675

 

16



General and Administrative
General and administrative expenses consist primarily of compensation for employees in executive and administrative functions including non-cash, share-based compensation expense, costs associated with our corporate infrastructure, and professional fees for business development, commercialization activities and market research, accounting and legal services and costs incurred related to the Merger.
Other Income (Expense), Net
Interest income consists of interest earned on our cash and cash equivalents.
Interest expense to date has consisted primarily of interest expense on convertible notes payable and long-term debt and the amortization of debt discounts and debt issuance costs. We amortize debt issuance costs over the life of the notes which are reported as interest expense in our statements of comprehensive income.
Other income and expense to date has primarily consisted of costs incurred from extinguishment of debt, changes in the fair value of Tranzyme's warrant liability and gains and losses on foreign currency transactions primarily from purchases made by Tranzyme Pharma.

Critical Accounting Policies and Significant Judgments and Estimates
Our management's discussion and analysis of financial condition and results of operations is based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported revenue and expenses during the reporting periods. On an ongoing basis, we evaluate our estimates and judgments related to preclinical, nonclinical and clinical development costs and drug manufacturing costs. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ materially from these estimates under different assumptions or conditions.
We discussed accounting policies and assumptions that involve a higher degree of judgment and complexity within our Annual Report on Form 10-K for the year ended December 31, 2012. There have been no material changes to our critical accounting policies and estimates as disclosed in our Annual Report on Form 10-K.

Results of Operations
 
Comparison of the Three Months Ended June 30, 2013 and 2012
 
Revenues
 
The following table summarizes Tranzyme's revenues for the three months ended June 30, 2013 and 2012 (in thousands, except percentages): 
 
Three Months Ended June 30,
 
Increase
(Decrease)
 
% Increase
(Decrease)
 
2013
 
2012
 
 
Licensing and royalties
$
893

 
$
1,340

 
$
(447
)
 
(33
)%
Research revenue

 
1,071

 
(1,071
)
 
(100
)%
Total
$
893

 
$
2,411

 
$
(1,518
)
 
(63
)%
     
The decrease in licensing and royalties for the three months ended June 30, 2013, was primarily due to a decrease in the amortization of deferred revenue from the upfront licensing fee received from Tranzyme's collaboration agreement with Norgine, which totaled $823,000 for the three month period ended June 30, 2012, as compared to no amortization for the three month period ended June 30, 2013. The decrease was offset by an increase in revenue for nonrefundable payments received upon transfer of material to third parties for the three month period ended June 30, 2013. The decrease in research revenue was primarily due to a decrease in reimbursable laboratory supply expenses and FTE's as defined in Tranzyme's collaboration agreement with BMS as a result of completion our development activities with BMS in January 2013.

Research and Development Expenses
 

17



The following table summarizes Tranzyme's research and development expenses for the three months ended June 30, 2013 and 2012 (in thousands, except percentages):
 
 
Three Months Ended June 30,
 
Increase
(Decrease)
 
% Increase
(Decrease)
 
2013
 
2012
 
 
Research and development expenses
$
1,218

 
$
5,535

 
$
(4,317
)
 
(78
)%

The decrease in research and development costs during the three months ended June 30, 2013, was primarily due to a decrease in expenses incurred for Tranzyme's Phase 3 clinical trials for ulimorelin and our Phase 2b trials for TZP-102 . Costs related to ulimorelin activities decreased by approximately $900,000, primarily due to completion of Tranzyme's Phase 3 clinical trials and the cessation of further development and regulatory activities following the results of the trials. Costs related to our Phase 2b trials for TZP-102 activities resulted in a decrease in clinical trial expenses of approximately $2.6 million primarily due to termination of its clinical activities following the results of these trials, both of which failed to show superiority to placebo. Other research and development expenses decreased by approximately $800,000 primarily due to a reduction in personnel related expenses and other expenses associated with Tranzyme's research activities.

General and Administrative Expenses
 
The following table summarizes Tranzyme's general and administrative expenses for the three months ended June 30, 2013 and 2012 (in thousands, except percentages):
 
 
Three Months Ended June 30,
 
Increase
(Decrease)
 
% Increase
(Decrease)
 
2013
 
2012
 
 
General and administrative
$
2,152

 
$
1,880

 
$
272

 
14
%
 
The increase in general and administrative expenses was due primarily the result of increased fees payable to legal and financial advisors as well as other administrative expenses related to the Merger offset by a decrease in other expenses for Tranzyme's pre-commercialization and other business development activities.

Other Income (Expense), Net
 
The following table summarizes Tranzyme's other expense for the three months ended June 30, 2013 and 2012 (in thousands, except percentages):
 
 
Three Months Ended June 30,
 
Increase
(Decrease)
 
% Increase
(Decrease)
 
2013
 
2012
 
 
Interest income (expense), net
$
5

 
$
(624
)
 
$
(629
)
 
(101
)%
Other income (expense)
4

 
19

 
(15
)
 
(79
)%
Total Change in Other Income (Expense)
$
9

 
$
(605
)
 


 


 
    The decrease in interest expense for the three month period ended June 30, 2013, was primarily due to a decrease in interest incurred on Tranzyme's term loan for the period. Other income is related to foreign currency transactions by Tranzyme Pharma.

Comparison of the Six Months Ended June 30, 2013 and 2012
 
Revenues
 
The following table summarizes Tranzyme's revenues for the six months ended June 30, 2013 and 2012 (in thousands, except percentages): 

18



 
Six Months Ended June 30,
 
Increase
(Decrease)
 
% Increase
(Decrease)
 
2013
 
2012
 
 
Licensing and royalties
$
1,492

 
$
2,783

 
$
(1,291
)
 
(46
)%
Research revenue

 
2,236

 
(2,236
)
 
(100
)%
Total
$
1,492

 
$
5,019

 
$
(3,527
)
 
(70
)%
 
The decrease in licensing and royalties for the six months ended June 30, 2013, was primarily due to a decrease in the amortization of deferred revenue from the upfront licensing fee received from Tranzyme's collaboration agreement with Norgine, which totaled $1.6 million for the six month period ended June 30, 2012, as compared to no amortization for the six month period ended June 30, 2013. The decrease was offset by an increase in other revenue for nonrefundable payments received upon transfer of material to a third party for the six month period ended June 30, 2013. The decrease in research revenue was primarily due to a decrease in reimbursable laboratory supply expenses and FTE's as defined in our collaboration agreement with BMS as a result of completion our development activities with BMS in January 2013.
    
Research and Development Expenses
 
The following table summarizes Tranzyme's research and development expenses for the six months ended June 30, 2013 and 2012 (in thousands, except percentages):
 
 
Six Months Ended June 30,
 
Increase
(Decrease)
 
% Increase
(Decrease)
 
2013
 
2012
 
 
Research and development expenses
$
3,074

 
$
13,675

 
$
(10,601
)
 
(78
)%

The decrease in licensing and royalties for the six months ended June 30, 2013, was primarily due to a decrease in the amortization of deferred revenue from the upfront licensing fee received from Tranzyme's collaboration agreement with Norgine, which totaled $1.6 million for the six month period ended June 30, 2012, as compared to no amortization for the six month period ended June 30, 2013. The decrease was offset by an increase in other revenue for nonrefundable payments received upon transfer of material to a third party for the six month period ended June 30, 2013. The decrease in research revenue was primarily due to a decrease in reimbursable laboratory supply expenses and FTE's as defined in Tranzyme's collaboration agreement with BMS as a result of completion our development activities with BMS in January 2013.
    
General and Administrative Expenses
 
The following table summarizes Tranzyme's general and administrative expenses for the six months ended June 30, 2013 and 2012 (in thousands, except percentages):
 
 
Six Months Ended June 30,
 
Increase
(Decrease)
 
% Increase
(Decrease)
 
2013
 
2012
 
 
General and administrative
$
4,288

 
$
3,828

 
$
460

 
12
%
 
The increase in general and administrative expenses was due primarily the result of increased fees payable to legal and financial advisors as well as other administrative expenses related to the Merger offset by a decrease in other expenses for Tranzyme's pre-commercialization and other business development activities.

Other Income (Expense), Net
 
The following table summarizes Tranzyme's other expense for the six months ended June 30, 2013 and 2012 (in thousands, except percentages):

19



 
 
Six Months Ended June 30,
 
Increase
(Decrease)
 
% Increase
(Decrease)
 
2013
 
2012
 
 
Interest income (expense), net
$
7

 
$
(1,056
)
 
$
(1,063
)
 
(101
)%
Other income (expense)
2

 
(489
)
 
(491
)
 
(100
)%
Total Change in Other Income (Expense)
$
9

 
$
(1,545
)
 


 


 
    The decrease in interest expense period was primarily due to a decrease in interest incurred on Tranzyme's term loan for the period. The increase in other income is due to a loss on extinguishment of debt as a result of refinancing of Tranzyme's term loan during the six month period ended June 30, 2012.

Liquidity and Capital Resources
  
Sources of Liquidity

Tranzyme has incurred losses since its inception and we anticipate that the combined company will continue to incur losses for at least the next several years. Historically, Tranzyme has financed our operations primarily through private placements of common stock and convertible preferred stock, issuance of convertible promissory notes to its stockholders, upfront payments from strategic partnerships, bank, other lender financing and development grants from governmental authorities and its public offerings of common stock. As of June 30, 2013, Tranzyme had $8.6 million in cash and cash equivalents. Cash in excess of immediate requirements is invested in accordance with our investment policy primarily with a view to liquidity and capital preservation. As of June 30, 2013, Tranzyme's cash and cash equivalents funds are invested in money market funds which are currently providing only a minimal return.
On April 6, 2011, Tranzyme completed an initial public offering of its common stock pursuant to a Registration Statement that was declared effective on April 1, 2011 yielding gross proceeds of $54.0 million. The underwriters had 30 days to exercise their option to purchase additional shares at the initial public offering price per share pursuant to an over-allotment option granted to the underwriters. On April 29, 2011, the underwriters partially exercised their over-allotment option and purchased additional shares of Tranzyme's common stock resulting in additional gross proceeds of $3.4 million.
Tranzyme raised approximately $51.4 million in net proceeds from the IPO after deducting underwriting discounts and commissions of $4.0 million and offering expenses of approximately $2.0 million after giving effect to the partial exercise of the underwriters' over-allotment option.
On May 7, 2012, Tranzyme filed a Registration Statement on Form S-3 with the Securities and Exchange Commission for the registration of up to $100.0 million of equity or other securities, proceeds from which will be used for general corporate purposes. The Form S-3 was declared effective on May 29, 2012 and afforded Tranzyme additional financial flexibility. On September 18, 2012, Tranzyme sold shares of its common stock and raised approximately $10.6 million, net of underwriting fees and commissions pursuant to its Form S-3.
In connection with the filing of the Form S-3, on May 7, 2012, Tranzyme entered into a Sales Agreement with Cowen and Company, LLC, or Cowen, to sell shares of its common stock with aggregate gross sales proceeds of up to $25.0 million, from time to time, through an “at the market” equity offering program, pursuant to which Cowen will act as sales agent. Subject to the terms and conditions of the Sales Agreement, Cowen will use commercially reasonable efforts to sell our common stock from time to time, based upon our instructions (including any price, time or size limits or other customary parameters or conditions we may impose). We have not sold any shares pursuant to the Sales Agreement as of June 30, 2013.
On July 15, 2013, we completed our Merger with Private Ocera. Immediately following the consummation of the Merger, we sold approximately $20 million in shares of common stock to the certain stockholders of Private Ocera and their affiliates at a per share purchase price of $6.0264. The Financing was a private placement exempt from registration under Section 4(2) and Regulation D under the Securities Act of 1933, as amended, and the rules promulgated thereunder. In connection with the Financing, we entered into a Registration Rights Agreement that granted customary registration rights to the participants in the Financing.
As previously announced by Tranzyme, on January 2, 2013, Tranzyme received a letter from the NASDAQ Stock Market notifying it that the minimum bid price per share for its common stock fell below $1.00 for a period of 30 consecutive business days and therefore we did not meet the minimum bid price requirement set forth in NASDAQ Listing Rule 5450(a)(1). Tranzyme was provided 180 calendar days to regain compliance with the minimum bid price requirement. To regain compliance, the closing bid price of its common stock had to be at least $1.00 for a minimum of 10 consecutive business days.  On July 2, 2013, Tranzyme received a letter from the NASDAQ Stock Market notifying it that, because it had not regained compliance with such minimum bid price requirement for continued listing, its common stock would be subject to

20



delisting on July 11, 2013 unless it requested a hearing before a NASDAQ Hearings Panel on or before July 9, 2013. Tranzyme timely requested a hearing from the NASDAQ Hearings Panel and stayed the delisting action until after the Merger. The shares of our common stock issued in the Merger and the Financing were listed on The NASDAQ Global Market.  Following the reverse stock split of our common stock and the closing of the Merger on July 15, 2013, our common stock continued to trade but  under the ticker symbol “OCRX.”  By letter dated July 22, 2013, we were informed by the staff of the NASDAQ Stock Market that the bid price deficiency had been cured, and we are in compliance with all applicable listing standards. Therefore, the requested hearing before the NASDAQ Hearings Panel was cancelled by NASDAQ.

Cash Flows
 
The following table sets forth the primary sources and uses of cash for each of the periods presented:
 
 
Six Months Ended
June 30,
 
2013
 
2012
Cash Flow from Continuing Operations :
 

 
 

Net cash used in operating activities
$
(6,662
)
 
$
(12,966
)
Net cash used in investing activities

 
(69
)
Net cash provided by financing activities

 
8,538

Effect of exchange rate changes on cash
(43
)
 
(46
)
Net decrease in cash and cash equivalents
$
(6,705
)
 
$
(4,543
)
 

During the six month periods ended June 30, 2013 and 2012, Tranzyme's operating activities used cash of $6.7 million, and $13.0 million, respectively, primarily due to Tranzyme's net losses from the operation of our business and changes in working capital, partially offset by non-cash charges including depreciation expense, share-based compensation expense and the amortization of deferred revenue from Tranzyme's licensing agreements. Cash provided by financing activities for the six months ended June 30, 2012 included $9.3 million of net term loan proceeds offset by principal payments on Tranzyme's previously outstanding term loan.

The Combined Company Following the Merger
We believe the Merger will form a leading orphan liver disease biopharmeutical company. The combined company's lead drug candidate is OCR-002, for patients with acute and chronic liver diseases, an area of high unmet medical need. OCR-002 is an ammonia scavenger designed to treat hyperammonemia (elevated ammonia in the blood) and associated hepatic encephalopathy, a complication of patients with liver cirrhosis. We licensed the compound from UCL Business PLC in 2008. OCR-002 has received Orphan Drug designation and Fast Track status from the FDA for the treatment of hyperammonemia and associated HE in patients with liver cirrhosis, acute liver failure and acute liver injury. We have completed Phase 1 and 2a studies in both healthy volunteers and patients with liver cirrhosis using the IV formulation of OCR-002. These studies established safety, tolerability and target dose for OCR-002.
In addition, OCR-002 is the subject of two ongoing, externally-sponsored Phase 2a studies. The first of these studies is evaluating OCR-002 in patients with known liver cirrhosis and elevated ammonia due to upper gastrointestinal bleeding, or UGIB. UGIB is a complication of liver cirrhosis, and often leads to acute HE. The open label phase of this study demonstrated that OCR-002 provides rapid and durable ammonia reduction within 36 hours of treatment. The second part of this study, a double-blind, placebo-controlled study to measure ammonia plasma concentration and improvement in HE is currently enrolling. Data from this study is expected in 2014.
The second externally sponsored Phase 2a study is with the Acute Liver Failure Study Group (ALFSG), funded by the National Institutes of Health. The ALSFG is studying OCR-002 for the treatment of patients with acute liver injury and acute liver failure due to acetaminophen overdose. We is currently planning to initiate a Phase 2b, randomized, double-blind, placebo-controlled, efficacy study of OCR-002 as a treatment for acute hepatic encephalopathy in hospitalized patients with liver cirrhosis. The study is expected to have approximately 200 patients, and enrollment is expected to begin in late 2013.
In addition to OCR-002, we have developed Zysa™ (AST-120) a spherical carbon adsorbent, for the treatment of irritable bowel syndrome. We licensed the compound from Kureha Corporation in 2005. In March 2012, Private Ocera received CE Mark for the sale of AST-120 as a medical device for the treatment of diarrhea predominant irritable bowel syndrome (d-IBS) in the European Market. We are currently evaluating strategic options for the commercialization of this product.
Capital Resources and Funding Requirements

21



The combined company will require substantial funds to continue its research and development programs and to fulfill our planned operating goals. We expect to continue to incur substantial operating losses in the future and that our operating expenses will fluctuate as we continue to develop our clinical product candidates, pursue other strategic opportunities and operating as a public company. In particular, currently planned operating capital requirements include the need for working capital to support our research and development activities for our drug candidates that we are seeking to develop, and to fund our general and administrative costs and expenses.
Following the Merger, the use of our cash flows for operations will primarily consist of salaries and wages for our employees, our facilities and facility-related costs for our offices, laboratory facilities, fees paid in connection with clinical studies, preclinical studies, laboratory supplies, consulting fees, and legal fees. We expect that costs associated with clinical studies will increase in future periods assuming that our lead product candidate, OCR-002, advances into further stages of clinical testing and our other preclinical candidates reach clinical trials. We expect to continue to use cash in operations as we continue to seek to advance our orphan drug programs through clinical development and preclinical testing.
We expect to fund our research and development expenses from our current cash and cash equivalents, from proceeds from the $20 million Financing, from cost-sharing reimbursement payments received from collaboration agreements, if any, and potentially, additional financing transactions or collaboration arrangements.
 Operating losses may be incurred over the next several years as we commence the development and seek regulatory approval for OCR-002, our pre-clinical product candidates, or other product candidates. At this time, we cannot reasonably estimate or know the nature, specific timing and estimated costs of the efforts that will be necessary to complete the development of our product candidates, or the period, if any, in which material net cash inflows may commence from our product candidates. This is due to the numerous risks and uncertainties associated with developing our product candidates, including:

the progress, costs, results of and timing of future clinical trials of any of our pre-clinical product candidates;
the costs and timing of obtaining regulatory approval in the United States and abroad for our product candidates;
the costs of obtaining, maintaining and enforcing our patents and other intellectual property rights globally;
the costs and timing of obtaining or maintaining manufacturing for our product candidates, including commercial manufacturing if any of our product candidates is approved;
the costs and timing of establishing sales and marketing capabilities in selected markets; and
the terms and timing of establishing collaborations, license agreements and other partnerships on terms favorable to us.
 Our expenses related to clinical trials are based on estimates of the services received and efforts expended pursuant to contracts with multiple research institutions and clinical research organizations that conduct and manage clinical trials on our behalf. The financial terms of these agreements are subject to negotiation and vary from contract to contract and may result in uneven payment flows. Generally, these agreements provide a fixed fee or unit price for services performed. Payments under the contracts depend on factors such as the successful enrollment of patients or the achievement of clinical trial milestones. Expenses related to clinical trials generally are accrued based on services performed at contractual amounts and the achievement of milestones such as number of patients enrolled. If timelines or contracts are modified based upon changes to the clinical trial design or scope of work to be performed, we modify our estimates of accrued expenses accordingly on a prospective basis. A change in the outcome of any of these variables with respect to the development of a product candidate could result in a significant change in the costs and timing associated with the development of that product candidate.
Our ability to finance ourselves will depend heavily on our ability to obtain favorable results in the ongoing clinical trials of OCR-002 and to successfully develop and commercialize OCR-002. We believe that our existing cash and cash equivalents will be sufficient to fund our anticipated operating requirements through at least the next 12 months. We have based this estimate on assumptions that may prove to be wrong resulting in the use of our available capital resources sooner than we currently expect. Because of the numerous risks and uncertainties associated with the development and commercialization of our product candidates, including our ability to enter into collaborations with third parties to participate in development and commercialization of our product candidates, we are unable to estimate the amount of increased capital required to become profitable. Our future funding requirements will depend on many factors, including:

unanticipated costs in our research and development programs;
the costs of maintaining, expanding and protecting our intellectual property portfolio, including potential litigation costs and liabilities;
the number and characteristics of product candidates that we pursue;
the timing and amount of payments received under new or existing strategic collaboration agreements, if any, including upfront payments, milestone payments and royalties;
the amount of cost sharing under new or existing strategic collaboration agreements, if any; and

22



our ability to hire qualified employees at salary levels consistent with our estimates to support our growth and development.
Until we obtain regulatory approval to market our product candidates, if ever, we cannot generate revenues from sales of our products. Even if we are able to sell our products, we may not generate a sufficient amount of product revenues to finance our cash requirements. Accordingly, we may need to obtain additional financing in the future which may include public or private debt and equity financings, entering into product and technology collaboration agreements or licenses and asset sales. There can be no assurance that additional capital will be available when needed on acceptable terms, or at all. The issuance of equity securities may result in dilution to stockholders. If we raise additional funds through the issuance of debt securities, these securities may have rights, preferences and privileges senior to those of our common stock and the terms of the debt securities could impose significant restrictions on our operations. If we raise additional funds through collaborations and licensing arrangements, we might be required to relinquish significant rights to our technologies or products, or grant licenses on terms that are not favorable to us. If adequate funds are not available, we may have to scale back our operations or limit our research and development activities, which would have a material adverse impact on our business prospects and results of operations.

Off-Balance Sheet Arrangements
 
We do not have any off-balance sheet arrangements.
 
Recent Accounting Pronouncements
 
In February 2013, the Financial Accounting Standards Board issued a final rule related to the reporting of amounts reclassified out of accumulated other comprehensive income that requires entities to report, either on their income statement or in a footnote to their financial statements, the effects on earnings from items that are reclassified out of other comprehensive income. These new accounting rules were effective as of the quarter ended March 31, 2013. The adoption of the new accounting rules did not have a material effect on Tranzyme's financial condition, results of operations or cash flows for the six month period ended June 30, 2013.

Item 3.         Quantitative and Qualitative Disclosures About Market Risk
 
Foreign Currency Risk
    
We incur a substantial amount of our research and development expenses through our Canadian subsidiary. In addition, Tranzyme has historically contracted with third-party providers to manufacture product and to conduct clinical trials and perform other research and development activities in Europe. Accordingly, we are exposed to fluctuations in foreign currency exchange rates in connection with the liabilities incurred by us in these relationships. We do not currently hedge our exposures to foreign currency fluctuations.
 
Market Risk
 
Tranzyme's cash and cash equivalents as of June 30, 2013, consisted primarily of cash and money market funds. Our primary exposure to market risk is interest income sensitivity, which is affected by changes in the general level of United States interest rates. However, because of the short-term nature of the instruments in our portfolio, a sudden change in market interest rates would not be expected to have a material impact on our financial condition and/or results of operations.
 
Interest Risk
 
Since the repayment of Tranzyme's term loan in December 2012, we are no longer exposed to market risk from changes in interest rates as it relates to these interest-bearing obligations.

Item 4.        Controls and Procedures
 
Disclosure Controls and Procedures
 
Our management, including our principal executive officer and our principal financial officer, evaluated, as of the end of the period covered by this Quarterly Report on Form 10-Q, the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended,

23



or the Exchange Act.  In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs. Based on that evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures as of the end of the period covered by this report were effective to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.
 
Changes to Internal Controls Over Financial Reporting
 
There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) or 15d-15(f) under the Exchange Act) during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

A controls system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.


24



PART II - OTHER INFORMATION
 
Item 1.            Legal Proceedings
 
We are not currently subject to any material legal proceedings.
 
Item 1A.   Risk Factors

 We operate in a rapidly changing environment that involves a number of risks that could materially affect our business, financial condition or future results, some of which are beyond our control. The risk factors described below pertain to the combined company following the closing of the Merger effected July 15, 2013 as described elsewhere in this Quarterly Report on Form 10-Q. These risk factors should be carefully considered, which risk factors could materially affect the combined business, its financial conditions or future results.
Risks Related to Our Business and the Development, Regulatory Approval and Commercialization of our Product Candidates
The failure to integrate successfully the businesses of the combined company could adversely affect our future results.
The success of the Merger will depend, in large part, on our ability to realize the anticipated benefits from combining the businesses of Tranzyme and Private Ocera. The failure to integrate successfully and to manage successfully the challenges presented by the integration process may result in our failure to achieve some or all of the anticipated benefits of the Merger. Potential difficulties that may be encountered in the integration process include the following:
using our cash and assets efficiently to develop our business;
appropriately managing our liabilities;
potential unknown or currently unquantifiable liabilities associated with the Merger and our operations; and
performance shortfalls as a result of the diversion of the management's attention caused by integrating the companies' operations.
Our success will depend in part on relationships with third parties, which relationships may be affected by third-party preferences or public attitudes about the Merger. Any adverse changes in these relationships could adversely affect our business, financial condition or results of operations.
Our success will be dependent on our ability to maintain and renew the business relationships of both Tranzyme and Private Ocera and to establish new business relationships. There can be no assurance that our management will be able to maintain such business relationships, or enter into or maintain new business contracts and other business relationships, on acceptable terms, if at all. The failure to maintain important business relationships could have a material adverse effect on our business, financial condition or results of operations.
We depend substantially on the success of our product candidate, OCR-002, and we may not successfully complete the development of OCR-002, obtain regulatory approval or successfully commercialize it.
We have invested a significant portion of our time and financial resources in the development of our clinical stage product candidates, ulimorelin for acceleration of postoperative gastrointestinal (GI) recovery, and TZP-102 for the treatment of symptoms associated with diabetic gastroparesis. In light of the results of our phase 3 clinical trials of ulimorelin and phase 2 clinical trials of TZP-102, we have stopped all development and new drug application, or NDA, related activities for ulimorelin and TZP-102. As a result, our business is substantially dependent on our ability to complete the development of, obtain regulatory approval for, and successfully commercialize OCR-002 for the treatment of hyperammonemia and associated hepatic encephalopathy, or HE, in patients with liver cirrhosis, acute liver failure and acute liver injury. The process to develop, obtain regulatory approval for and commercialize OCR-002 is long, complex and costly.
We have not submitted an NDA or received regulatory approval to market for any of our product candidates in any jurisdiction. We have only limited experience in filing the applications necessary to gain regulatory approvals and expect to rely on consultants and third party contract research organizations to assist us in this process. Securing FDA approval requires the submission of extensive preclinical and clinical data, information about product manufacturing processes and inspection of facilities and supporting information to the U.S. Food and Drug Administration, or FDA, for each therapeutic indication to establish each product candidate's safety and efficacy. Our product candidates, and any future product candidates, may not be effective, may be only moderately effective or may prove to have undesirable or unintended side effects, toxicities or other characteristics that may preclude our obtaining regulatory approval or prevent or limit commercial use.

25



Our product candidates and the activities associated with their development and commercialization, including their testing, manufacture, safety, efficacy, recordkeeping, labeling, storage, approval, advertising, promotion, sale and distribution, are subject to comprehensive regulation by the FDA and other regulatory agencies in the United States and by comparable authorities in other countries. We are not permitted to market our product candidates in the United States until we receive approval of an NDA for the product candidate in a particular indication from the FDA. Failure to obtain regulatory marketing approval for a product candidate will prevent us from commercializing the product candidate, and our ability to generate revenue will be materially impaired.
The process of obtaining regulatory approvals is expensive, often takes many years, if approval is obtained at all, and can vary substantially based upon, among other things, the type, complexity and novelty of the product candidates involved. Changes in the regulatory approval policy during the development period, changes in or the enactment of additional statutes or regulations, or changes in regulatory review for a submitted product application, may cause delays in the approval or rejection of an application. Regulatory approval obtained in one jurisdiction does not necessarily mean that a product candidate will receive regulatory approval in all jurisdictions in which we may seek approval.
The FDA, EMA and other regulators have substantial discretion in the approval process and may form an opinion, after review of our data, that the new drug application, or NDA, is insufficient to allow approval of OCR-002 for either HE or acute liver failure. The FDA may require that we conduct additional clinical, nonclinical, manufacturing validation or drug product quality studies and submit such data before it will consider or reconsider the NDA. Depending on the extent of these or any other studies, approval of any applications that we submit may be delayed, or may require us to expend more resources than we have available. It is also possible that additional studies, if performed and completed, may not be considered sufficient by the FDA to approve the use of OCR-002 for either HE or acute liver failure. If any of these outcomes occur, we may not receive approval for OCR-002. Even if we obtain FDA approval for OCR-002, the approval might contain significant limitations related to use restrictions for certain age groups, warnings, precautions or contraindications, or may be subject to significant post-marketing studies or risk mitigation requirements. If we are unable to successfully commercialize OCR-002, we may not be able to earn sufficient revenues to continue our business.
The ability to show a statistically significant reduction in the clinical severity of Hepatic Encephalopathy in our planned phase 2b and phase 3 studies highly depends on the efficacy of OCR-002.
To date, the clinical trials relating to OCR-002 have studied, as a primary endpoint, the ability of OCR-002 to reduce plasma ammonia in the patient population. While we believe that a reduction in patient's plasma ammonia levels is linked to our planned HE endpoint of a reduction in the clinical severity of Hepatic Encephalopathy, which we intend to use in our phase2b and phase 3 studies, the study results may not bear this out.
Any safety or efficacy concerns, or delays in enrollment, relating to the two externally sponsored phase 2a studies of OCR-002 may delay or prevent approval of OCR-002.
There are two externally sponsored phase 2a studies that are ongoing. A study of OCR-002 was initiated in patients with liver cirrhosis and upper GI bleeding. While, in an open label portion of the study, the first cohort of patients suggested that the drug is well tolerated and provides rapid and durable ammonia reduction within 36 hours of treatment, there can be no assurance that similar results will be demonstrated in the ongoing double-blind, placebo-controlled portion of the study designed to measure ammonia plasma concentration. If the results of this phase 2a study, which are currently planned for 2014, are not positive, we may need to spend additional time evaluating the results and our OCR-002 development plans.
The National Institutes of Health is funding a second phase 2a study of OCR-002, the Acute Liver Failure Study Group, for the treatment of patients with acute liver injury, as well as those that have progressed to acute liver failure following acetaminophen overdose. Enrollment in this clinical trial is ongoing. In March 2013, the FDA approved less restrictive enrollment inclusion criteria for the study, which we believe will allow for a somewhat more rapid enrollment of patients. However, there can be no assurance that enrollment will occur on a timely basis or that the study will ever achieve full enrollment. In the event that safety or efficacy concerns are raised by this study, we may no longer be able to pursue an acute liver failure indication for OCR-002.
The patient populations suffering from both HE and acute liver failure are small. If we are unable to timely enroll our clinical trials or reach the desired enrollment levels, our development program for OCR-002 will likely be delayed.
We estimate that in the United States, the annual number of hospitalizations due to HE is approximately 150,000 cases, and the annual number of hospitalizations due to acute liver failure is approximately 2,000-3,000. To date, the largest clinical trial studying OCR-002 involved approximately 77 patients. We currently plan to enroll substantially greater numbers of patients in our anticipated phase 2b study and, if the phase 2b study is successful, our future phase 3 studies. If the enrollment in these studies is delayed, it will result in delays in our OCR-002 development program and the time to commercialization.
To obtain regulatory approval to market OCR-002 in additional indications and formulations, additional costly

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and lengthy clinical studies will be required, and the results are uncertain.
As part of the regulatory approval process, we will conduct, at our own expense, nonclinical and clinical studies for each indication and formulation that we intend to pursue. We expect the number of nonclinical and clinical studies that the regulatory authorities will require will vary. Generally, the number and size of clinical trials required for approval depends on the nature of the disease and size of the expected patient population that may be treated with a drug. We may need to perform additional nonclinical and clinical studies, which could result in delays in our ability to market OCR-002 for any additional indications, or in additional formulations.
Serious adverse events or other safety risks could require us to abandon development and preclude or limit approval of OCR-002 to treat HE or acute liver failure.
We may voluntarily suspend or terminate our clinical trials if at any time we believes that they present an unacceptable risk to participants or if preliminary data demonstrates that one of our product candidates is unlikely to receive regulatory approval or unlikely to be successfully commercialized. In addition, regulatory agencies, institutional review boards or data safety monitoring boards may at any time order the temporary or permanent discontinuation of our clinical trials or request that we cease using investigators in the clinical trials if they believe that the clinical trials are not being conducted in accordance with applicable regulatory requirements, or that they present an unacceptable safety risk to participants. If we elect or are forced to suspend or terminate a clinical trial of OCR-002 to treat HE or acute liver failure, the commercial prospects for
OCR-002 will be harmed and our ability to generate product revenues from OCR-002 may be delayed or eliminated.
Even though we have received orphan drug designation, we may not receive orphan drug exclusivity for OCR-002.
As part of our business strategy, we have obtained orphan drug designation in the United States for OCR-002 for the treatment of both HE and acute liver failure. We have also obtained orphan drug designation in the European Union for
OCR-002 for the treatment of acute liver failure and are planning to submit such a request for the HE indication in the near future. In the United States, the company that first obtains FDA approval for a designated orphan drug for the specified rare disease or condition receives orphan drug marketing exclusivity for that drug for a period of seven years. This orphan drug exclusivity prevents the FDA from approving another application, including a full NDA, to market the same drug for the same orphan indication, except in very limited circumstances, including when the FDA concludes that the later drug is safer, more effective or makes a major contribution to patient care. For purposes of small molecule drugs, the FDA defines "same drug" as a drug that contains the same active chemical entity and is intended for the same use as the drug in question. To obtain orphan drug exclusivity for a drug that shares the same active chemical entity as an already orphan designated drug, it must be demonstrated to the FDA that the drug is safer or more effective than the approved orphan designated drug, or that it makes a major contribution to patient care. In addition, a designated orphan drug may not receive orphan drug exclusivity if it is approved for a use that is broader than the indication for which it received orphan designation. In addition, orphan drug exclusive marketing rights in the United States may be lost if the FDA later determines that the request for designation was materially defective or if the manufacturer is unable to assure sufficient quantity of the drug to meet the needs of patients with the rare disease or condition.
Even if we obtain orphan drug exclusivity for OCR-002, that exclusivity may not effectively protect the product from competition because different drugs can be approved for the same condition.
Even if the FDA approves OCR-002 in the United States, we may never obtain approval for or commercialize OCR-002 outside of the United States, which would limit our ability to realize our full market potential.
In order to market OCR-002 outside of the United States, we must comply with the regulatory requirements of, and obtain the required regulatory approvals in, other countries. Clinical trials conducted in one country may not be accepted by the regulatory authorities in other countries, and obtaining regulatory approval in one country does not mean that regulatory approval will be obtained in any other country. Approval processes vary among countries and can involve additional product testing and validation and additional administrative review periods. Seeking foreign regulatory approval could require additional nonclinical studies or clinical trials, which could be costly and time consuming. Regulatory requirements can vary widely from country to country and could delay or prevent the introduction of OCR-002 in those countries. If we fail to comply with regulatory requirements in international markets or to obtain and maintain required approvals or if regulatory approvals in international markets are delayed, our target market will be reduced and our ability to realize the full market potential of our products will be harmed.

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Our future growth depends, in part, on our ability to penetrate foreign markets, where we are subject to additional regulatory burdens and other risks and uncertainties. However, we have limited experience marketing and servicing our products outside North America.
Our future profitability will depend, in part, on our ability to grow and ultimately maintain our sales in foreign markets. We may rely on third parties to support our foreign operations.
Any foreign operations we establish in the future subject us to additional risks and uncertainties, including:
our customers' ability to obtain reimbursement for procedures using our products in foreign markets;
our inability to directly control commercial activities because we are relying on third parties who may not put the same priority on our products as we would;
the burden of complying with complex and changing foreign regulatory, tax, accounting and legal requirements;
different medical practices and customs in foreign countries affecting acceptance in the marketplace;
import or export licensing requirements;
longer accounts receivable collection times;
longer lead times for shipping;
language barriers for technical training;
reduced protection of intellectual property rights in some foreign countries;
foreign currency exchange rate fluctuations; and
the interpretation of contractual provisions governed by foreign laws in the event of a contract dispute.
Foreign sales of our products could also be adversely affected by the imposition of governmental controls, political and economic instability, trade restrictions, changes in tariffs and difficulties in staffing and managing foreign operations .
If we obtain approval to commercialize OCR-002 outside of the United States, a variety of risks associated with international operations could materially adversely affect our business.
If OCR-002 is approved outside the United States, we will likely enter into agreements with third parties to commercialize and distribute OCR-002 outside the United States. We expect that we will be subject to additional risks related to entering into or maintaining these international business relationships, including:

different regulatory requirements for drug approvals in foreign countries;
differing U.S. and foreign drug import and export rules;
reduced protection for intellectual property rights in foreign countries;
unexpected changes in tariffs, trade barriers and regulatory requirements;
different reimbursement systems;
economic weakness, including inflation, or political instability in particular foreign economies and markets;
compliance with tax, employment, immigration and labor laws for employees living or traveling abroad;
foreign taxes, including withholding of payroll taxes;
foreign currency fluctuations, which could result in increased operating expenses and reduced revenues, and other obligations incident to doing business in another country;
workforce uncertainty in countries where labor unrest is more common than in the United States;
production shortages resulting from any events affecting raw material supply or manufacturing capabilities abroad;
potential liability resulting from development work conducted by these distributors; and
business interruptions resulting from geopolitical actions, including war and terrorism, or natural disasters.
Our products and product candidates are subject to extensive regulatory requirements.

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Even if a drug is FDA-approved, regulatory requirements still impose significant restrictions on a product's indicated uses and marketing and the FDA may impose ongoing requirements for potentially costly post-marketing studies. Furthermore, any new legislation addressing drug safety issues could result in delays or increased costs to assure compliance.
AST-120 is and OCR-002, if approved, will be subject to ongoing regulatory requirements for labeling, packaging, storage, advertising, promotion, sampling, record-keeping and submission of safety and other post-market information, including both federal and state requirements in any jurisdiction in which we or a partner commercialize the product. In addition, manufacturers and their facilities are required to comply with extensive FDA requirements, including ensuring that quality control and manufacturing procedures conform to current Good Manufacturing Practices, or cGMP. As such, we and our contract manufacturers are subject to continual review and periodic inspections to assess compliance with cGMP. Accordingly, we and others with whom we work must continue to expend time, money, and effort in all areas of regulatory compliance, including manufacturing, production, and quality control. We will also be required to report certain adverse reactions and production problems, if any, to the FDA and applicable foreign regulatory bodies, and to comply with requirements concerning advertising and promotion for our products. Promotional communications with respect to prescription drugs are subject to a variety of legal and regulatory restrictions and must be consistent with the information in the product's approved label. As such, we may not promote our products for indications or uses for which we do not have FDA or foreign approval, as applicable.
If a regulatory agency discovers previously unknown problems with a product, such as adverse events of unanticipated severity or frequency, or problems with the facility where the product is manufactured, or disagrees with the promotion, marketing, or labeling of a product, a regulatory agency may impose restrictions on that product, including requiring withdrawal of the product from the market. If we fail to comply with applicable regulatory requirements, a regulatory agency or enforcement authority may:
issue warning letters;
impose civil or criminal penalties;
suspend regulatory approval;
suspend any of our ongoing clinical trials;
refuse to approve pending applications or supplements to approved applications submitted by us;
impose restrictions on our operations, including closing our contract manufacturers' facilities; or
seize or detain products or require a product recall.

Any government investigation of alleged violations of law could require us to expend significant time and resources in response and could generate negative publicity. Any failure to comply with ongoing regulatory requirements may significantly and adversely affect our ability to commercialize and generate revenues from AST-120 and OCR-002, if approved. If regulatory sanctions are applied or if regulatory approval is withdrawn, the value of our company and our operating results will be adversely affected. Additionally, if we are unable to generate revenues from the sale of AST-120 and OCR-002, if approved, our potential for achieving profitability will be diminished and the capital necessary to fund our operations will be increased.
Any product for which we obtain marketing approval could be subject to restrictions or withdrawal from the market and we may be subject to penalties if we fail to comply with regulatory requirements or if we experience unanticipated problems with our product candidates, when and if any of them are approved.
Even if U.S. regulatory approval is obtained, the FDA may still impose significant restrictions on a product's indicated uses or marketing or impose ongoing requirements for potentially costly and time consuming post-approval studies, post-market surveillance or clinical trials. Our product candidates will also be subject to ongoing FDA requirements governing the labeling, packaging, storage, distribution, safety surveillance, advertising, promotion, recordkeeping and reporting of safety and other post-market information. In addition, manufacturers of drug products and their facilities are subject to continual review and periodic inspections by the FDA and other regulatory authorities for compliance with cGMP requirements relating to quality control, quality assurance and corresponding maintenance of records and documents. If we or a regulatory agency discovers previously unknown problems with a product, such as adverse events of unanticipated severity or frequency, or problems with the facility where the product is manufactured, a regulatory agency may impose restrictions on that product, the manufacturing facility or us, including requesting recall or withdrawal of the product from the market or suspension of manufacturing.

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If we, our product candidates or the manufacturing facilities for our product candidates fail to comply with applicable regulatory requirements, a regulatory agency may:
issue warning letters or untitled letters;
seek an injunction or impose civil or criminal penalties or monetary fines;
suspend or withdraw regulatory approval;
suspend any ongoing clinical trials;
refuse to approve pending applications or supplements or applications filed by us;
suspend or impose restrictions on operations, including costly new manufacturing requirements; or
seize or detain products, refuse to permit the import or export of product, or request us to initiate a product recall.
The occurrence of any event or penalty described above may inhibit our ability to commercialize our products and generate revenue. 
The FDA has the authority to require a risk evaluation and mitigation strategy plan as part of an NDA or after approval, which may impose further requirements or restrictions on the distribution or use of an approved drug, such as limiting prescribing to certain physicians or medical centers that have undergone specialized training, limiting treatment to patients who meet certain safe-use criteria and requiring treated patients to enroll in a registry.
In addition, if any of our product candidates are approved, our product labeling, advertising and promotion would be subject to regulatory requirements and continuing regulatory review. The FDA strictly regulates the promotional claims that may be made about prescription products. In particular, a product may not be promoted for uses that are not approved by the FDA as reflected in the product's approved labeling. If we receive marketing approval for our product candidates, physicians may nevertheless prescribe our products to their patients in a manner that is inconsistent with the approved label. If we are found to have promoted such off-label uses, we may become subject to significant liability. The FDA and other agencies actively enforce the laws and regulations prohibiting the promotion of off-label uses, and a company that is found to have improperly promoted off-label uses may be subject to significant sanctions. The federal government has levied large civil and criminal fines against companies for alleged improper promotion and has enjoined several companies from engaging in off-label promotion. The FDA has also requested that companies enter into consent decrees or permanent injunctions under which specified promotional conduct is changed or curtailed.
Recently enacted and future legislation may increase the difficulty and cost for us to obtain marketing approval of and commercialize our product candidates and affect the prices we may obtain.
  In the United States and some foreign jurisdictions, there have been a number of legislative and regulatory changes and proposed changes regarding the healthcare system that could prevent or delay marketing approval for our product candidates, restrict or regulate post-approval activities and affect our ability to profitably sell any of our product candidates for which we obtain marketing approval.
Legislative and regulatory proposals have been made to expand post-approval requirements and restrict sales and promotional activities for pharmaceutical products. We are not sure whether additional legislative changes will be enacted, or whether the FDA regulations, guidance or interpretations will be changed, or what the impact of such changes on the marketing approvals of our product candidates, if any, may be. In addition, increased scrutiny by the U.S. Congress of the FDA's approval process may significantly delay or prevent marketing approval, as well as subject us to more stringent product labeling and post-marketing testing and other requirements. 
In the United States, the MMA changed the way Medicare covers and pays for pharmaceutical products. The legislation expanded Medicare coverage for drug purchases by the elderly and introduced a new reimbursement methodology based on average sales prices for drugs. In addition, this legislation authorized Medicare Part D prescription drug plans to use formularies where they can limit the number of drugs that will be covered in any therapeutic class. As a result of this legislation and the expansion of federal coverage of drug products, we expect that there will be additional pressure to contain and reduce costs. These cost reduction initiatives and other provisions of this legislation could decrease the coverage and price that we receive for any approved products and could seriously harm our business. While the MMA applies only to drug benefits for Medicare beneficiaries, private payors often follow Medicare coverage policy and payment limitations in setting their own reimbursement rates, and any reduction in reimbursement that results from the MMA may result in a similar reduction in payments from private payors. 
In March 2010, President Obama signed into law the Health Care Reform Law, a sweeping law intended to broaden

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access to health insurance, reduce or constrain the growth of healthcare spending, enhance remedies against fraud and abuse, add new transparency requirements for healthcare and health insurance industries, impose new taxes and fees on the health industry and impose additional health policy reforms. Effective October 1, 2010, the Health Care Reform Law revised the definition of “average manufacturer price” for reporting purposes, which could increase the amount of Medicaid drug rebates to states. Further, the new law imposed a significant annual fee on companies that manufacture or import branded prescription drug products. Substantial new provisions affecting compliance have also been enacted, which may require us to modify our business practices with healthcare practitioners. We will not know the full effects of the Health Care Reform Law until applicable federal and state agencies issue regulations or guidance under the new law. Although it is too early to determine the effect of the Health Care Reform Law, the new law appears likely to continue the pressure on pharmaceutical pricing, especially under the Medicare program, and may also increase our regulatory burdens and operating costs.
If our competitors are able to develop and market products that are preferred over OCR-002, our commercial opportunity for such product candidate will be reduced.

We face competition from established pharmaceutical and biotechnology companies, as well as from academic institutions, government agencies and private and public research institutions, which may in the future develop products to treat HE, acute liver failure and irritable bowel syndrome. Even if we complete development, obtain regulatory approval and commercialize OCR-002 to treat HE in chronic patient population in oral formulation, we will face competition from Salix Pharmaceuticals, Inc., the manufacturer of rifaximin, as well as generic manufacturers of lactulose. Additionally, Hyperion Therapeutics has announced its intent to develop HPN-100 (Ravicti™), currently approved for the treatment of Urea Cycle Disorder, for the treatment of HE, which we expect to compete with OCR-002. In addition, researchers are continually learning more about liver disease including HE, and new discoveries may lead to new therapies. As a result, OCR-002 may be rendered less competitive. Other early-stage companies may also prove to be significant competitors, particularly through collaborative arrangements with large and established companies.

Our commercial opportunity will be reduced if our competitors develop and commercialize products that are safer, more effective, have fewer side effects, are more convenient or are less expensive than OCR-002. We expect that our ability to compete effectively will depend upon, among other things, our ability to:
successfully and rapidly complete clinical trials and obtain all required regulatory approvals in a timely and cost- effective manner;
maintain patent protection for OCR-002 and otherwise prevent the introduction of generics of OCR-002;
attract and retain key personnel;
build an adequate sales and marketing infrastructure;
obtain adequate reimbursement from third-party payors; and
maintain positive relationships with patient advocacy groups.
The commercial success of AST-120 and OCR-002 will depend upon the degree of market acceptance among physicians, patients, patient advocacy groups, health care payors and the medical community. If we fail to achieve market acceptance of AST-120 and OCR-002, our revenue will be more limited and it will be more difficult to achieve profitability.

AST-120 and OCR-002 may not gain sufficient market acceptance among physicians, patients, patient advocacy groups, health care payors and the medical community and our business may suffer. The degree of market acceptance of AST-120 and OCR-002 will depend on a number of factors, including:

the effectiveness of such products as compared to other products pertaining to their respective indications;
the prevalence and severity of any side effects;
the market price and patient out-of-pocket costs of the product relative to other treatment options, including any generics;
relative convenience and ease of administration;
willingness by patients to stop using current treatments and adopt a new treatment;
restrictions on healthcare provider prescribing of and patient access to our products due to a Risk Evaluation
Mitigation Strategy, or REMS;

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the strength of our marketing and distribution organizations;
the quality of our relationship with patient advocacy groups; and
sufficient third-party coverage or reimbursement.

If we fail to obtain and sustain an adequate level of reimbursement for our products by third-party payors, our sales, revenue and gross margins would be adversely affected, and we may not find it commercially viable. Third-party payors, such as government or private health care insurers, carefully review and increasingly question the coverage of, and challenge the prices charged for, drugs. Reimbursement rates from private health insurance companies vary depending on the company, the insurance plan and other factors. A current trend in the United States health care industry is toward cost containment. Large public and private payors, managed care organizations, group purchasing organizations and similar organizations are exerting increasing influence on decisions regarding the use of, and reimbursement levels for, particular treatments. Such third-party payors, including Medicare, are questioning the coverage of, and challenging the prices charged for, medical products and services, and many third-party payors limit coverage of or reimbursement for newly approved health care products. In particular, third-party payors may limit the covered indications. Cost-control initiatives could decrease the price we might establish for products, which could result in product revenues being lower than anticipated. If the prices for our products decrease or if governmental and other third-party payors do not provide adequate coverage and reimbursement levels, our revenue and prospects for profitability will suffer. Reimbursement systems in international markets vary significantly by country and by region, and reimbursement approvals must be obtained on a country-by-country basis.

Reimbursement in the European Union must be negotiated on a country-by-country basis and in many countries the product cannot be commercially launched until reimbursement is approved. The negotiation process in some countries can exceed 12 months.

If we are unable to establish a direct sales force for OCR-002 in the United States, our business may be harmed.

We currently do not have an established sales organization. If OCR-002 is approved by the FDA for commercial sale, we may market OCR-002 directly to physicians in the United States through our own sales force. We will need to incur significant additional expenses and commit significant additional management resources to establish and train a sales force to market and sell OCR-002. We may not be able to successfully establish these capabilities despite these additional expenditures. We will also have to compete with other pharmaceutical and life sciences companies to recruit, hire, train and retain sales and marketing personnel. In the event we are unable to successfully market and promote OCR-002, our business may be harmed.

We are evaluating strategic options for AST-120. If we are unable to establish and implement an appropriate plan, we will not receive any revenues and may be required to return the product to the licensor.

In March 2012, we received a CE Mark for the sale of AST-120 as a medical device for the treatment of diarrhea predominant irritable bowel syndrome (IBS) in the European Market. However, we have not commercialized AST-120 and, as a result, we have not generated any revenue from the sale of AST-120. We are currently evaluating our options for AST-120. If we are unable to determine and implement an appropriate strategic plan for AST-120, we will not receive any revenue in relation to this product. Furthermore, if we do not make commercially reasonable efforts to develop and commercialize AST-120, the license agreement may be terminated and all rights to AST-1 may revert to the licensor.

If we fail to establish an effective distribution process utilizing specialty pharmacies, our business could suffer materially and our stock price could decline.

We do not currently have the infrastructure necessary for distributing pharmaceutical products to patients. We intend to contract with a third-party logistics company to warehouse these products and distribute them to specialty pharmacies. A specialty pharmacy is a pharmacy that specializes in the dispensing of medications for complex or chronic conditions which require a high level of patient education and ongoing management. This distribution network will require significant coordination with our sales and marketing and finance organizations. Failure to secure contracts with a logistics company and specialty pharmacies could negatively impact the distribution of our products, and failure to coordinate financial systems could negatively impact its ability to accurately report product revenue. If we are unable to effectively establish and manage the distribution process, the commercial launch and sales of our products will be delayed or severely compromised and our results of operations may be harmed.

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In addition, the use of specialty pharmacies involves certain risks, including, but not limited to, risks that these specialty pharmacies will:
not provide us with accurate or timely information regarding their inventories, the number of patients who are using our products, or complaints regarding our products;
not effectively sell or support our products;
reduce their efforts or discontinue to sell or support our products;
not devote the resources necessary to sell our products in the volumes and within the time frames that we expect;
not comply with any requirements imposed on pharmacies through REMS;
be unable to satisfy financial obligations to us; or
cease operations.
Any such failure may result in decreased product sales and lower product revenue, which would harm our business.
Though we continue to explore additional funded collaborations involving our MATCH drug discovery platform, we may be unable to attract new partners which could adversely affect our business.
Identifying and consummating a collaboration transaction with a new partner is subject to a number of risks including:
we may face competition from other macrocycle developers limiting our ability to attract new partners;
MATCH exclusivity may become compromised by closely related technology copies that are offered under more attractive conditions elsewhere;
other companies may choose to establish proprietary macrocyclic chemistry technology in-house and deprioritize respective partnerships;
existing or perceived disadvantages of macrocyclic chemistry may cause a shift of technology priorities in pharmaceutical drug discovery with declining interest in MATCH; and
introduction of new drug discovery technologies in pharmaceutical companies' research and development may replace macrocycles in general and render MATCH technology unattractive.
If our strategic partner fails to perform its obligations under our agreement, the development and commercialization of the product candidates under such agreement could be delayed or terminated and our business could be substantially harmed.
We entered into a strategic collaboration with Bristol-Myers Squibb Company, or BMS, primarily focused on the identification and optimization of novel drug compounds for certain targets of interest to BMS. The research portion of the collaboration was completed in December 2012 and we transferred compounds to BMS for further development across multiple drug targets. BMS has primary responsibility for optimizing the identified lead compounds, and sole responsibility for completing preclinical and clinical development of all products arising from the collaboration, and for their commercialization globally. Total milestone payments to us under the agreement, excluding royalties and sales milestones, could reach up to approximately $80 million for each target program. However, this strategic partnership may not be scientifically or commercially successful due to a number of important factors, including the following:

BMS has significant discretion in determining the efforts and resources that they will apply to their strategic relationship with us. The timing and amount of any cash payments, milestones and royalties that we may receive under such agreements will depend on, among other things, the efforts, allocation of resources and successful development and commercialization of any product candidates by BMS under its agreement.
Our agreement with BMS provides it with wide discretion in deciding which novel compounds to advance through the clinical development process. It is possible for BMS to reject certain compounds at any point in the research, development and clinical trial process without triggering a termination of their agreement with us. In the

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event of any such decision, our business and prospects may be adversely affected due to our inability to progress such compounds ourselves.
BMS may develop and commercialize, either alone or with others, or be acquired by a company that has products that are similar to or competitive with the product candidates that it licenses from us.
BMS may change the focus of its development and commercialization efforts or pursue higher-priority programs.
BMS has, under certain circumstances, the first right to maintain or defend our intellectual property rights licensed to it, and, although we may have the right to assume the maintenance and defense of our intellectual property rights if our strategic partner does not, our ability to do so may be compromised by our strategic partner's acts or omissions.
BMS may utilize our intellectual property rights in such a way as to invite litigation that could jeopardize or invalidate our intellectual property rights or expose us to potential liability.
BMS may not comply with all applicable regulatory requirements, or fail to report safety data in accordance with all applicable regulatory requirements.
If BMS fails to develop or effectively commercialize novel compounds for any of the foregoing reasons, we may not be able to replace the strategic partner with another partner. We may also be unable to obtain, on terms acceptable to us, a license from such strategic partner to any of its intellectual property that may be necessary or useful for us to continue to develop and commercialize a product candidate. Any of these events could have a material adverse effect on our business, results of operations and our ability to achieve future profitability, and could cause our stock price to decline.
If we fail to attract and retain senior management and key scientific personnel, we may be unable to successfully develop our product candidates, conduct clinical trials and commercialize our product candidates.
      Our success depends in part on our continued ability to attract, retain and motivate highly qualified management, clinical and scientific personnel. We are highly dependent upon our senior management, as well as other senior scientists and members of our management team. The loss of services of any of these individuals or one or more of our other members of senior management could delay or prevent the successful development of our product pipeline or the commercialization of our product candidates. We need to hire and retain qualified personnel for the development, manufacture and commercialization of drugs. We could experience problems in the future attracting and retaining qualified employees. For example, competition for qualified personnel in the biotechnology and pharmaceuticals field is intense. We may not be able to attract and retain quality personnel on acceptable terms who have the expertise we need to sustain and grow our business.
If we are found in violation of federal or state "fraud and abuse" laws, we may be required to pay a penalty and/or be suspended from participation in federal or state health care programs, which may adversely affect our business, financial condition and results of operation.
In the United States, we are subject to various federal and state health care "fraud and abuse" laws, including anti- kickback laws, false claims laws and other laws intended to reduce fraud and abuse in federal and state health care programs. The federal Anti-Kickback Statute makes it illegal for any person, including a prescription drug manufacturer (or a party acting on its behalf), to knowingly and willfully solicit, receive, offer or pay any remuneration that is intended to induce the referral of business, including the purchase, order or prescription of a particular drug for which payment may be made under a federal health care program, such as Medicare or Medicaid. Under federal government regulations, some arrangements, known as safe harbors, are deemed not to violate the federal Anti-Kickback Statute. Although we seek to structure our business arrangements in compliance with all applicable requirements, these laws are broadly written, and it is often difficult to determine precisely how the law will be applied in specific circumstances. Accordingly, it is possible that our practices may be challenged under the federal Anti-Kickback Statute. False claims laws prohibit anyone from knowingly and willfully presenting or causing to be presented for payment to third-party payors, including government payors, claims for reimbursed drugs or services that are false or fraudulent, claims for items or services that we are not provided as claimed, or claims for medically unnecessary items or services. Cases have been brought under false claims laws alleging that off-label promotion of pharmaceutical products or the provision of kickbacks has resulted in the submission of false claims to governmental health care programs. Under the Health Insurance Portability and Accountability Act of 1996, we are prohibited from knowingly and willfully executing a scheme to defraud any health care benefit program, including private payors, or knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false, fictitious or fraudulent statement in connection with the delivery of or payment for health care benefits, items or services. Violations of fraud and abuse laws may be punishable by criminal and/

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or civil sanctions, including fines and/or exclusion or suspension from federal and state health care programs such as Medicare and Medicaid and debarment from contracting with the U.S. government. In addition, private individuals have the ability to bring actions on behalf of the government under the federal False Claims Act as well as under the false claims laws of several states.
Many states have adopted laws similar to the federal anti-kickback statute, some of which apply to the referral of patients for health care services reimbursed by any source, not just governmental payors. In addition, California and a few other states have passed laws that require pharmaceutical companies to comply with the April 2003 Office of Inspector General Compliance Program Guidance for Pharmaceutical Manufacturers and/or the Pharmaceutical Research and Manufacturers of America, Code on Interactions with Healthcare Professionals. In addition, several states impose other marketing restrictions or require pharmaceutical companies to make marketing or price disclosures to the state. There are ambiguities as to what is required to comply with these state requirements and if we fail to comply with an applicable state law requirement we could be subject to penalties.
Neither the government nor the courts have provided definitive guidance on the application of fraud and abuse laws to our business. Law enforcement authorities are increasingly focused on enforcing these laws, and it is possible that some of its practices may be challenged under these laws. While we believe we has structured our business arrangements to comply with these laws, it is possible that the government could allege violations of, or convict us of violating, these laws. If we are found in violation of one of these laws, we could be required to pay a penalty and could be suspended or excluded from participation in federal or state health care programs, and our business, financial condition and results of operations may be adversely affected.
Risks Related to Our Financial Position and Need for Additional Capital
We anticipate that we will continue to incur net losses for the foreseeable future.
We anticipate that a substantial portion of our capital resources and efforts in the foreseeable future will be focused on completing the development and obtaining regulatory approval of OCR-002. As a result, we expect to continue to incur significant and increasing operating losses and negative cash flows for the foreseeable future. These losses have had and will continue to have an adverse effect on stockholders' deficit and working capital.
If we fail to obtain the capital necessary to fund our operations, we will be unable to successfully develop and commercialize our most advanced product candidates.
We will need to obtain additional financing to fund future operations, including the development and commercialization of OCR-002 and the commercialization of AST-120, and to support sales and marketing activities. We would likely need to obtain additional financing to conduct a phase 3 trial of OCR-002 in HE, for pre-clinical and clinical work relating to an oral dose form of OCR-002, and for development of any additional product candidates. Moreover, our fixed expenses such as rent, license payments, interest expense and other contractual commitments are substantial and are expected
to increase in the future.
Our future funding requirements will depend on many factors, including, but not limited to:
the initiation, progress, timing, scope and costs of our nonclinical studies and clinical trials, including the ability to timely enroll patients in our planned and potential future clinical trials;
the time and cost necessary to obtain regulatory approvals;
the costs of manufacture clinical and commercial supplies of our product candidates, including OCR-002;
payments of milestones and royalties to third parties;
the costs and timing of establishing sales and marketing capabilities in selected markets;
the terms and timing of establishing collaborations, license agreements and other partnerships on terms favorable to us;
the time and cost necessary to respond to technological and market developments;
the costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights; and
any changes made to, or new developments in, our restated collaboration agreement with UCL Business PLC or
Kureha Corporation or any new collaborative, licensing and other commercial relationships that we may

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establish.
We have not generated any revenue from the sale of any products and does not know when, or if, we will generate any revenue. Until we can generate a sufficient amount of revenue, we may raise additional funds through collaborations and public or private debt or equity financings. Additional funds may not be available when needed on terms that are acceptable, or at all. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest of existing stockholders will be diluted, and the terms may include liquidation or other preferences that adversely affect the rights of existing stockholders. Debt financing, if available, would result in increased fixed payment obligations and may involve agreements that include covenants limiting or restricting our ability to take specific actions such as incurring debt, making capital expenditures or declaring dividends. We may seek to access the public or private capital markets whenever conditions are favorable, even if we do not have an immediate need for additional capital at that time.
We believe that our current cash and cash equivalents will be sufficient to fund our anticipated operating requirements through at least the next twelve months. This estimate is based on a number of assumptions that may prove wrong, and changing circumstances beyond our control may cause the consumption of capital more rapidly than currently anticipated. Inability to obtain funding when needed could seriously harm the business.
Our future financial results could be adversely impacted by asset impairments or other charges.
Applicable accounting standards requires that we test assets determined to have long lives for impairment on an annual, or on an interim basis if certain events occur or circumstances change that would reduce the fair value of an asset below its carrying value. In addition, long-lived assets with finite lives are tested for impairment whenever events or changes in circumstances indicate that its carrying value may not be recoverable. A significant decrease in the fair value of a long-lived asset, an adverse change in the extent or manner in which a long-lived asset is being used or in its physical condition or an expectation that a long-lived asset will be sold or disposed of significantly before the end of its previously estimated life are among several of the factors that could result in an impairment charge. We intend to evaluate the carrying value of our assets to determine if the merger and private placement indicate that the carrying amounts of such assets may not be recoverable. Such a review could result in an impairment charge, which could have a negative impact on our results of operations and financial position, as well as on the market price of our common stock.
Risks Related to Our Reliance on Third Parties
We have no manufacturing capacity and anticipate continued reliance on third-party manufacturers for the development and commercialization of our products.
We do not currently operate manufacturing facilities for clinical or commercial production of any product. We have no experience in drug formulation, and we lack the resources and the capabilities to manufacture OCR-002 on a clinical or commercial scale. We do not intend to develop facilities for the manufacture of products for clinical trials or commercial purposes in the foreseeable future. We rely on third-party manufacturers to produce bulk drug substance and drug products required for our clinical trials. We plan to continue to rely upon contract manufacturers and, potentially, collaboration partners to manufacture commercial quantities of our drug product candidates if and when approved for marketing by the applicable regulatory authorities. We have clinical supplies of the active pharmaceutical ingredient for OCR-002 manufactured for us by a single drug substance supplier Helsinn Chemicals SA. The OCR-002 finished product manufacturing and filling is undertaken by AAI Pharma Service Corp. on our behalf. We have not secured commercial supply agreements with any contract manufacturers and can give no assurance that we will enter commercial supply agreements with any contract manufacturers on favorable terms or at all. For AST-120, we rely solely on Kureha for manufacturing and commercial supply.
Our contract manufacturers' failure to achieve and maintain high manufacturing standards, in accordance with applicable regulatory requirements, or the incidence of manufacturing errors, could result in patient injury or death, product shortages, product recalls or withdrawals, delays or failures in product testing or delivery, cost overruns or other problems that could seriously harm our business. Contract manufacturers often encounter difficulties involving production yields, quality control and quality assurance, as well as shortages of qualified personnel.
Our existing manufacturer and any future contract manufacturers may not perform as agreed or may not remain in the contract manufacturing business. In the event of a natural disaster, business failure, strike or other difficulty, we may be unable to replace a third-party manufacturer in a timely manner and the production of our products would be interrupted, resulting in delays and additional costs.
Some of the intellectual property necessary for the commercialization of our products is or will be licensed from third parties, which will require us to pay milestones and royalties.

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We have a license agreement on OCR-002 with UCL Business PLC for worldwide rights to develop and commercialize our product candidate and related technologies for any use. We may be required to make future milestone payments totaling up to $17.0 million upon the achievement of various milestones related to regulatory or commercial events for OCR-002. We may also be required to pay incremental milestone payments for an additional dosage form. We are also obligated to pay a royalty in the low to mid-single digits on future net sales of the licensed product.
We have also in-licensed from Kureha Corporation the technology and exclusive development and commercialization rights to the AST-120 product candidate for the treatment of liver and gastrointestinal disease for the territories worldwide outside of certain Asian countries. We are required to make future milestone payments upon the achievement of various milestones related to regulatory or commercial events for the first indications in gastrointestinal diseases. We are also obligated to pay a royalty in the single digits on future net sales. In April 2012, we amended the license agreement to include the development and commercialization of AST-120 as a medical device for IBS in European countries. Under this amended agreement, we may be required to make milestone payments based on future commercial milestones and net sales.
We may become obligated to make a milestone or royalty payments when we do not have the cash on hand to make these payments or have budgeted cash for our development efforts. This could cause us to delay our development efforts, curtail our operations, scale back our commercialization and marketing efforts or seek additional capital to meet these obligations, which could be on terms unfavorable to us. Additionally, if we fail to make a required payment and do not cure the failure within the required time period, the licensor may be able to terminate our license to use the licensed technology. If our license from UCL Business PLC or Kureha is terminated, it will likely be impossible for us to commercialize OCR-002 or AST-120, respectively.
We currently depend on third parties to conduct some of the operations of our clinical trials and on a single third-party to supply OCR-002 for our clinical uses in connection with the development of, and application for regulatory approval of, such product candidate.
We rely on third parties, such as contract research organizations, medical institutions, clinical investigators and contract laboratories to oversee some of the operations of our clinical trials and to perform data collection and analysis. As a result, we may face additional delays outside of our control if these parties do not perform their obligations in a timely fashion or in accordance with regulatory requirements. If these third parties do not successfully carry out their contractual duties or obligations and meet expected deadlines, if they need to be replaced, or if the quality or accuracy of the clinical data they obtain is compromised due to the failure to adhere to our clinical protocols or for other reasons, our financial results and the commercial prospects for OCR-002 or our other potential product candidates could be harmed, our costs could increase and our ability to obtain regulatory approval and commence product sales could be delayed.
Risks Related to Product Liability
If product liability lawsuits are successfully brought against us, we will incur substantial liabilities and may be required to limit the commercialization of AST-120, OCR-002 or other products.
We face an inherent risk of product liability as a result of the clinical testing of our product candidates and will face an even greater risk if we commercialize any products. For example, we may be sued if any product we develop allegedly causes injury or is found to be otherwise unsuitable during product testing, manufacturing, marketing or sale. Any such product liability claims may include allegations of defects in manufacturing, defects in design, a failure to warn of dangers inherent in the product, negligence, strict liability and a breach of warranties. Claims could also be asserted under state consumer protection acts. If we cannot successfully defend ourselves against product liability claims, we may incur substantial liabilities or be required to limit commercialization of our product candidates. Even successful defense would require significant financial and management resources. Regardless of the merits or eventual outcome, liability claims may result in:
decreased demand for our product candidates or products that we may develop;
injury to our reputation;
withdrawal of clinical trial participants;
costs to defend the related litigation;
a diversion of management's time and our resources;
substantial monetary awards to trial participants or patients;
product recalls, withdrawals or labeling, marketing or promotional restrictions;
loss of revenue;

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the inability to commercialize our product candidates; and
a decline in our stock price.
In addition, while we continue to take what we believes are appropriate precautions, we may be unable to avoid significant liability if any product liability lawsuit is brought against us.
If product liability lawsuits are successfully brought against us, our insurance may be inadequate.
We are exposed to the potential product liability risks inherent in the testing, manufacturing and marketing of human pharmaceuticals. We plan to maintain insurance against product liability lawsuits for commercial sale of AST-120 and OCR-002, if approved for sale. We currently maintain insurance for the clinical trials of product candidates. Biopharmaceutical companies must balance the cost of insurance with the level of coverage based on estimates of potential liability. Historically, the potential liability associated with product liability lawsuits for pharmaceutical products has been unpredictable. Although we believe that our current insurance is a reasonable estimate of our potential liability and represents a commercially reasonable balancing of the level of coverage as compared to the cost of the insurance, we may be subject to claims in connection with clinical trials and commercial use of AST-120, OCR-002 and other product candidates, for which existing insurance coverage may not be adequate.
The product liability insurance we will need to obtain in connection with the commercial sales of our product and product candidates, if and when they receive regulatory approval, may be unavailable in meaningful amounts or at a reasonable cost. If we are the subject of a successful product liability claim that exceeds the limits of any insurance coverage obtained, we may incur substantial charges that would adversely affect earnings and require the commitment of capital resources that might otherwise be available for the development and commercial launch of product programs.
Risks Related to Our Intellectual Property
We may not be able to protect our proprietary technology in the marketplace.
We place considerable importance on obtaining patent protection for new technologies, products and processes because our commercial success will depend, in part, on obtaining patent protection for new technologies, products and processes, successfully defending these patents against third-party challenges and successfully enforcing our patents against third party competitors. To that end, we file applications for patents covering compositions of matter or uses of our product candidates or our proprietary processes as well as other intellectual property important to our business.
Where appropriate, we seek patent protection for certain aspects of our technology. Patent protection may not be available for some of the products or technology we are developing. If we must spend significant time and money protecting or enforcing our patents, designing around patents held by others or licensing, potentially for large fees, patents or other proprietary rights held by others, our business and financial prospects may be harmed. We may not develop additional proprietary products which are patentable.
The patent positions of pharmaceutical and biotechnology companies can be highly uncertain and involve complex legal, scientific and factual questions. Accordingly, our patent applications may never be approved by U.S. or foreign patent offices and the patents and patent applications relating to our products, product candidates and technologies may be challenged, invalidated or circumvented by third parties and might not protect us against competitors with similar products or technologies. Publication of information related to OCR-002 and our future products and product candidates may prevent us from obtaining or enforcing patents relating to these products and product candidates, including without limitation composition-of- matter patents, which are generally believed to offer the strongest patent protection.
We own, or have licensed, patents in the United States and in certain foreign jurisdictions related to AST-120 and OCR-002. Patents that we own or license do not ensure the protection of our intellectual property for a number of reasons, including without limitation the following:
we may be required to disclaim part of the term of one or more patents;
there may be prior art of which we are not aware that may affect the validity or enforceability of a patent claim;
there may be prior art of which we are aware, which we do not believe affects the validity or enforceability of a patent claim, but which, nonetheless ultimately may be found to affect the validity or enforceability of a patent claim;
there may be other patents existing in the patent landscape for OCR-002 that will affect our freedom to operate;

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if our patents are challenged, a court could determine that they are not valid or enforceable;
a court could determine that a competitor's technology or product does not infringe our patents; and
our patents could irretrievably lapse due to failure to pay fees or otherwise comply with regulations, or could be subject to compulsory licensing.
If we encounter delays in our development or clinical trials, the period of time during which we could market our products under patent protection would be reduced.
Others have filed, and in the future are likely to file, patent applications covering products and technologies that are similar, identical or competitive to ours, or important to our business. We cannot be certain that any patent application owned by a third party will not have priority over patent applications filed or in-licensed by us, or that we or our licensors will not be involved in interference, opposition or invalidity proceedings before U.S. or foreign patent offices. In addition, under the recently enacted America Invents Act of 2011, or AIA, the U.S. patent system, among other things, will transition from a first-to-invent to a first-to-file patent system, will increase the scope of prior art available for patentability and invalidity determinations, and will introduce new procedures, including post-grant review and inter parties review, for challenging U.S. patents once they have granted.  The various provisions of the AIA, once they become effective, may impact our ability to secure meaningful patent protection for inventions that we develop in the future.
We also rely on trade secrets to protect technology in cases when we believe patent protection is not appropriate or obtainable. However, trade secrets are difficult to protect. While we require employees, academic collaborators, consultants and other contractors to enter into confidentiality agreements, we may not be able to adequately protect our trade secrets or other proprietary information. Our research collaborators and scientific advisors have rights to publish data and information in which we have rights. If we cannot maintain the confidentiality of our technology and other confidential information in connection with our collaborators and advisors, our ability to receive patent protection or protect our proprietary information may be imperiled.
We may not be able to enforce our intellectual property rights throughout the world.
The laws of some foreign countries do not protect intellectual property rights to the same extent as the laws of the United States. Many companies have encountered significant problems in protecting and defending intellectual property rights in certain foreign jurisdictions. The legal systems of some countries, particularly developing countries, do not favor the enforcement of patents and other intellectual property protection, especially those relating to life sciences. This could make it difficult for us to stop the infringement of our in-licensed patents or the misappropriation of our other intellectual property rights. For example, many foreign countries have compulsory licensing laws under which a patent owner must grant licenses to third parties. In addition, many countries limit the enforceability of patents against third parties, including government agencies or government contractors. In these countries, patents may provide limited or no benefit.
Proceedings to enforce our patent rights in foreign jurisdictions could result in substantial costs and divert our efforts and attention from other aspects of our business. Accordingly, our efforts to protect our intellectual property rights in such countries may be inadequate. In addition, changes in the law and legal decisions by courts in the United States and foreign countries may affect our ability to obtain adequate protection for our technology and the enforcement of intellectual property.
We may infringe the intellectual property rights of others, which may prevent or delay our product development efforts and stop us from commercializing or increase the costs of commercializing our products.
Our commercial success depends significantly on our ability to operate without infringing the patents and other intellectual property rights of third parties. For example, there could be issued patents of which we are not aware that our products infringe. There also could be patents that we believe we do not infringe, but that we may ultimately be found to infringe. Moreover, patent applications are in some cases maintained in secrecy until patents are issued. The publication of discoveries in the scientific or patent literature frequently occurs substantially later than the date on which the underlying discoveries e made and patent applications we filed. Because patents can take many years to issue, there may be currently pending applications of which we are unaware that may later result in issued patents that our products infringe. For example, pending applications may exist that provide support or can be amended to provide support for a claim that results in an issued patent that our product infringes.
Third parties may assert that we are employing their proprietary technology without authorization. If a court held that any third-party patents are valid, enforceable and cover our products or their use, the holders of any of these patents may be able to block our ability to commercialize our products unless we obtained a license under the applicable patents, or until the patents expire. We may not be able to enter into licensing arrangements or make other arrangements at a reasonable cost or on

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reasonable terms. Any inability to secure licenses or alternative technology could result in delays in the introduction of our products or lead to prohibition of the manufacture or sale of products by us.
We may be unable to adequately prevent disclosure of trade secrets and other proprietary information.
We rely on trade secrets to protect our proprietary know-how and technological advances, especially where we do not believe patent protection is appropriate or obtainable. However, trade secrets are difficult to protect. We rely in part on confidentiality agreements with our employees, consultants, outside scientific collaborators, sponsored researchers and other advisors to protect our trade secrets and other proprietary information. These agreements may not effectively prevent disclosure of confidential information and may not provide an adequate remedy in the event of unauthorized disclosure of confidential information. In addition, others may independently discover our trade secrets and proprietary information. Costly and time- consuming litigation could be necessary to enforce and determine the scope of our proprietary rights. Failure to obtain or maintain trade secret protection could enable competitors to use our proprietary information to develop products that compete with our products or cause additional, material adverse effects upon our competitive business position.
Any lawsuits relating to infringement of intellectual property rights necessary to defend us or enforce our rights will be costly and time consuming.

Our ability to defend our intellectual property may require us to initiate litigation to enforce our rights or defend our activities in response to alleged infringement of a third-party. In addition, we may be sued by others who hold intellectual property rights who claim that their issued patents are infringed by AST-120 or any future products, including OCR-002, or product candidates. These lawsuits can be very time consuming and costly. There is a substantial amount of litigation involving patent and other intellectual property rights in the biotechnology and pharmaceutical industries generally.
In addition, our patents and patent applications, or those of our licensors, could face other challenges, such as interference proceedings, opposition proceedings, and re-examination proceedings. Any of these challenges, if successful, could result in the invalidation of, or in a narrowing of the scope of, any of our patents and patent applications subject to challenge. Any of these challenges, regardless of their success, would likely be time consuming and expensive to defend and resolve and would divert our management's time and attention.
We may be subject to claims that we have wrongfully hired an employee from a competitor or that we or our employees have wrongfully used or disclosed alleged confidential information or trade secrets of their former employers.
As is commonplace in our industry, we employ individuals who were previously employed at other biotechnology or pharmaceutical companies, including our competitors or potential competitors. Although no claims against us are currently pending, we may be subject in the future to claims that our employees or prospective employees are subject to a continuing obligation to their former employers (such as non-competition or non-solicitation obligations) or claims that our employees or we have inadvertently or otherwise used or disclosed trade secrets or other proprietary information of their former employers. Litigation may be necessary to defend against these claims. Even if we are successful in defending against these claims, litigation could result in substantial costs and be a distraction to management.
If we do not obtain protection under the Hatch-Waxman Amendments and similar foreign legislation by extending the patent terms and obtaining data exclusivity for our product candidates, our business may be materially harmed.
Depending upon the timing, duration and specifics of FDA marketing approval of our product candidates, one or more of our U.S. patents may be eligible for limited patent term restoration under the Drug Price Competition and Patent Term Restoration Act of 1984, referred to as the Hatch-Waxman Amendments. The Hatch-Waxman Amendments permit a patent restoration term of up to five years as compensation for patent term lost during product development and the FDA regulatory review process. However, we may not be granted an extension because of, for example, failing to apply within applicable deadlines, failing to apply prior to expiration of relevant patents or otherwise failing to satisfy applicable requirements. Moreover, the applicable time period or the scope of patent protection afforded could be less than we request. If we are unable to obtain patent term extension or restoration or the term of any such extension is less than we request, our competitors may obtain approval of competing products following our patent expiration, and our revenue could be reduced, possibly materially.
Risks Related to Ownership of Our Capital Stock
Our principal stockholders, executive officers and directors own a significant percentage of our common stock and will be able to exert a significant control over matters submitted to the stockholders for approval.
Our officers and directors, and stockholders who own more than 5% of our common stock beneficially owns a

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significant percentage of our common stock. This significant concentration of share ownership may adversely affect the trading price for our common stock because investors often perceive disadvantages in owning stock in companies with controlling stockholders. These stockholders, if they acted together, could significantly influence all matters requiring approval by the stockholders, including the election of directors. The interests of these stockholders may not always coincide with the interests of other stockholders.
The trading price of the shares of our common stock could be highly volatile, and purchasers of our common stock could incur substantial losses.
Our stock price is likely to be volatile. The stock market in general and the market for biotechnology companies in particular have experienced extreme volatility that has often been unrelated to the operating performance of particular companies. As a result of this volatility, investors may not be able to sell their common stock at or above the price at which it was purchased. The market price for our common stock may be influenced by many factors, including:
results of the development efforts involving our product candidates, those of our competitors or those of other companies in our market sector;
regulatory developments in the United States and foreign countries;
variations in our financial results or those of companies that are perceived to be similar to us;
changes in the structure of healthcare payment systems, especially in light of current reforms to the U.S. healthcare system;
announcements by us or our competitors of significant acquisitions, strategic partnerships, joint ventures or capital commitments;
market conditions in the pharmaceutical and biotechnology sectors and issuance of securities analysts' reports or recommendations;
sales of our stock by insiders and 5% stockholders;
general economic, industry and market conditions;
additions or departures of key personnel;
intellectual property, product liability or other litigation against us;
expiration or termination of our relationships with our collaborators; and
the other factors described in this “Risk Factors” section.
In addition, in the past, stockholders have initiated class action lawsuits against biotechnology and pharmaceutical companies following periods of volatility in the market prices of these companies' stock. Such litigation, if instituted against us, could cause us to incur substantial costs and divert management's attention and resources, which could have a material adverse effect on our business, financial condition and results of operations.
Our quarterly operating results may fluctuate significantly.
We expect our operating results to be subject to quarterly fluctuations. Our net loss and other operating results will be affected by numerous factors, including:
variations in the level of expenses related to our development programs;
addition or termination of clinical trials;
any intellectual property infringement lawsuit in which we may become involved;
regulatory developments affecting our product candidates;
our execution of any collaborative, licensing or similar arrangements, and the timing of payments we may make or receive under these arrangements; and
the achievement and timing of milestone payments under our existing strategic partnership agreements.
 If our quarterly operating results fall below the expectations of investors or securities analysts, the price of our common stock could decline substantially. Furthermore, any quarterly fluctuations in our operating results may, in turn, cause

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the price of our stock to fluctuate substantially.
Our ability to use net operating loss and tax credit carryforwards and certain built-in losses to reduce future tax payments is limited by provisions of the Internal Revenue Code, and may be subject to further limitation as a result of the Merger and prior or future offerings of our stock.
Section 382 and 383 of the Internal Revenue Code of 1986, as amended, or the Code, contain rules that limit the ability of a company that undergoes an ownership change, which is generally any change in ownership of more than 50% of its stock over a three-year period, to utilize its net operating loss and tax credit carryforwards and certain built-in losses recognized in years after the ownership change. These rules generally operate by focusing on ownership changes involving stockholders owning directly or indirectly 5% or more of the stock of a company and any change in ownership arising from a new issuance of stock by the company. Generally, if an ownership change occurs, the yearly taxable income limitation on the use of net operating loss and tax credit carryforwards and certain built-in losses is equal to the product of the applicable long term tax exempt rate and the value of the company's stock immediately before the ownership change. We may be unable to offset future taxable income, if any, with losses, or our tax liability with credits, before such losses and credits expire and therefore would incur larger federal income tax liability.
In addition, it is likely that Merger and the prior public offerings of our stock, either on a standalone bases or when combined with future transactions, will cause us to undergo one or more additional ownership changes. In that event, we generally would not be able to use our pre-change loss or credit carryovers or certain built-in losses prior to such ownership change to offset future taxable income in excess of the annual limitations imposed by Sections 382 and 383 and those attributes already subject to limitations as a result of our prior ownership changes may be subject to more stringent limitations.
Anti-takeover provisions in our charter documents and under Delaware law could make an acquisition of us, which may be beneficial to our stockholders, more difficult and may prevent attempts by our stockholders to replace or remove our current management.
Provisions in our amended and restated certificate of incorporation and amended and restated bylaws may delay or prevent an acquisition of us or a change in our management. These provisions include:
the prohibition on actions by written consent of our stockholders;
the limitation on who may call a special meeting of stockholders;
the establishment of advance notice requirements for nominations for election to our board of directors or for proposing matters that can be acted upon at stockholder meetings;
the ability of our board of directors to issue preferred stock without stockholder approval, which would increase the number of outstanding shares and could thwart a takeover attempt; and
the requirement of at least 75% of the outstanding common stock to amend any of the foregoing provisions.
 In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which limits the ability of stockholders owning in excess of 15% of our outstanding voting stock to merge or combine with us. Although we believe these provisions collectively provide for an opportunity to obtain greater value for stockholders by requiring potential acquirers to negotiate with our board of directors, they would apply even if an offer rejected by our board were considered beneficial by some stockholders. In addition, these provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors, which is responsible for appointing the members of our management. 
We do not intend to pay dividends on our common stock and, consequently, your ability to achieve a return on your investment will depend on appreciation in the price of our common stock.
We have never declared or paid any cash dividend on our common stock and do not currently intend to do so for the foreseeable future. We currently anticipate that we will retain future earnings for the development, operation and expansion of our business and do not anticipate declaring or paying any cash dividends for the foreseeable future. Therefore, the success of an investment in shares of our common stock will depend upon any future appreciation in their value. There is no guarantee that shares of our common stock will appreciate in value or even maintain the price at which our stockholders have purchased their shares.
Future sales of our common stock may cause our stock price to decline.

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If our existing stockholders sell, or indicate an intent to sell, substantial amounts of our common stock in the public market after legal restrictions lapse, the trading price of our common stock could decline significantly. Moreover, a relatively small number of our stockholders own large blocks of shares. We cannot predict the effect, if any, that public sales of these shares or the availability of these shares for sale will have on the market price of our common stock.
Failure to achieve and maintain effective internal controls in accordance with Section 404 of the Sarbanes-Oxley Act could have a material adverse effect on our ability to produce accurate financial statements and on our stock price.
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, we are required to furnish a report by our management on our internal control over financial reporting. The internal control report must contain (a) a statement of management's responsibility for establishing and maintaining adequate internal control over financial reporting, (b) a statement identifying the framework used by management to conduct the required evaluation of the effectiveness of our internal control over financial reporting, and (c) management's assessment of the effectiveness of our internal control over financial reporting as of the end of our most recent fiscal year, including a statement as to whether or not internal control over financial reporting is effective.
To achieve compliance with Section 404 within the prescribed period, we are engaged in a process to document and evaluate our internal control over financial reporting, which is both costly and challenging. In this regard, we will have dedicated internal resources, engaged outside consultants and adopted a detailed work plan to (a) assess and document the adequacy of internal control over financial reporting, (b) take steps to improve control processes where appropriate, (c) validate through testing that controls are functioning as documented, and (d) implement a continuous reporting and improvement process for internal control over financial reporting. Though smaller reporting companies are not required to have their external auditors test internal controls or provide an attestation report on internal control over financial reporting, management will still need to do its assessment and there is a risk that we will not be able to conclude within the prescribed time frame that our internal control over financial reporting is effective as required by Section 404. This could result in an adverse reaction in the financial markets due to a loss of confidence in the reliability of our financial statements.
If securities or industry analysts do not publish research or reports or publish unfavorable research or reports about our business, our stock price and trading volume could decline.
The trading market for our common stock will depend in part on the research and reports that securities or industry analysts publish about us, our business, our market or our competitors. We have limited research coverage by securities and industry analysts and may not maintain such coverage or obtain research coverage by additional securities and industry analysts. If we do not maintain such existing coverage, and additional securities or industry analysts do not commence coverage of our company, the trading price for our stock would be negatively impacted. If one or more of the analysts who covers us downgrades our stock, our stock price would likely decline. If one or more of these analysts ceases to cover us or fails to regularly publish reports on us, interest in our stock could decrease, which could cause our stock price or trading volume to decline.


Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
On July 15, 2013, we completed a business combination with Ocera Therapeutics, Inc., a privately held Delaware corporation developing novel therapeutics for liver diseases, or Ocera, in accordance with the terms of the Agreement and Plan of Merger and Reorganization, dated as of April 23, 2013, or the Merger Agreement, by and among us, Ocera and Terrapin Acquisition, Inc., a Delaware corporation and our newly-formed, wholly-owned subsidiary, or the Merger Subsidiary. Pursuant to the Merger Agreement, Merger Subsidiary merged with and into Ocera, with Ocera, renamed as Ocera Subsidiary, Inc., surviving the merger as our wholly-owned subsidiary, or the Merger. Immediately following the Merger, we changed the name of the company to “Ocera Therapeutics, Inc.”
In connection with the Merger, on July 15, 2013, we effected a 12-to-1 reverse stock of our outstanding common stock. As a result of the Merger and after giving effect to a 12-to-1 reverse stock split, each outstanding share of Ocera's common converted into the right to receive approximately 0.11969414 shares of our common stock. At the effective time of the Merger, each outstanding option to purchase Ocera's common stock and warrant to purchase Ocera's common stock was converted into an option or warrant to purchase our common stock. Each of Ocera's options and warrants were assumed by us in accordance with its terms. No fractional shares of our common stock were issued in connection with the Merger. Instead, Ocera stockholders received cash in lieu of any fractional shares of our common stock such stockholders would otherwise be entitled to receive in accordance with the Merger Agreement.

On April 23, 2013, concurrently with the execution of the Merger Agreement, we entered into a Securities Purchase

43



Agreement, or the Financing Agreement, with certain existing Ocera stockholders and their affiliates. Pursuant to the Financing Agreement, immediately following the consummation of the Merger, we sold approximately $20 million in shares of our common stock, or the Financing, to the financing participants at a per share purchase price of $6.0264, representing the volume weighted average closing price of our common stock for the 10 trading days ending the day prior to the closing of the Merger. The Financing was consummated on July 15, 2013 pursuant to a private placement exempt from registration under Section 4(2) and Regulation D under the Securities Act of 1933, as amended, and the rules promulgated thereunder. Concurrently with the execution of the Financing Agreement, we entered into a Registration Rights Agreement that granted customary registration rights to the participants in the Financing.

The foregoing description of the Merger Agreement and the Financing Agreement is not complete and is qualified in
its entirety by reference to the Merger Agreement and the Financing Agreement, which were previously filed as Exhibit 2.1 and Exhibit 10.1, respectively, to the Form 8-K filed by us on April 29, 2013, and are incorporated herein by reference.

Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.

Item 5. Other Information

None.

44




Item 6.    Exhibits
 
(a) Exhibits required by Item 601 of Regulation S-K.
 

Exhibit
Number
 
Description
2.1

 
Agreement and Plan of Merger and Reorganization, dated as of April 23, 2013, by and among the Company, Terrapin Acquisition, Inc. and Ocera Therapeutics, Inc. (Incorporated by reference to Exhibit 2.1 of the Company's Current Report on Form 8-K, filed on April 29, 2013).
3.1*

 
Eighth Amended and Restated Certificate of Incorporation of the Company as amended.
3.2

 
Form of Amended and Restated Bylaws of the Company (Incorporated by reference to Exhibit 3.3 of the Company’s Registration Statement on Form S-1, as amended (File No. 333-170749)).
4.1

 
Specimen Common Stock Certificate (Incorporated by reference to Exhibit 4.1 of the Company’s Current Report on Form 8-K, as filed on July 15, 2013.
4.2

 
Fourth Amended and Restated Registration Rights Agreement dated as of May 12, 2005 by and among the Company and the investors listed therein, as amended (Incorporated by reference to Exhibit 4.2 of the Company’s Registration Statement on Form S-1, as amended (File No. 333-170749)).
4.3

 
Warrant to Purchase Stock dated December 3, 2008 issued by the Company to Oxford Finance Corporation (Incorporated by reference to Exhibit 4.3 of the Company’s Registration Statement on Form S-1, as amended (File No. 333-170749)).
4.4

 
Warrant to Purchase Stock dated December 3, 2008 issued by the Company to Silicon Valley Bank (Incorporated by reference to Exhibit 4.4 of the Company’s Registration Statement on Form S-1, as amended (File No. 333-170749)).
4.5

 
Warrant to Purchase Stock dated September 30, 2010 issued by the Company to Compass Horizon Funding Company LLC (Incorporated by reference to Exhibit 4.5 of the Company’s Registration Statement on Form S-1, as amended (File No. 333-170749)).
4.6

 
Warrant to Purchase Stock dated September 30, 2010 issued by the Company to Oxford Finance Corporation (Incorporated by reference to Exhibit 4.6 of the Company’s Registration Statement on Form S-1, as amended (File No. 333-170749)).
4.7

 
Form of Warrant to Purchase Stock issued by the Company on January 31, 2012 (Incorporated by reference to Exhibit 4.1 of the Company's Current Report on Form 8-K filed on February 1, 2012).
4.8*

 
Form of Common Stock Purchase Warrants, dated March 30, 2012, issued by Ocera Subsidiary, Inc. (f/k/a Ocera Therapeutics, Inc.).
4.9*

 
Form of Common Stock Purchase Warrants, dated October 1, 2012, issued by Ocera Subsidiary, Inc. (f/k/a Ocera Therapeutics, Inc.).
10.1

 
Securities Purchase Agreement, dated as of April 23, 2013, by and among the Company and certain shareholders of Ocera Therapeutics, Inc. named therein (Incorporated by reference to Exhibit 10.1 of the Company's Current Report on Form 8-K, filed on April 29, 2013).
10.2

 
Registration Rights Agreement, dated as of April 23, 2013, by and among the Company and certain shareholders of Ocera Therapeutics, Inc. named therein (Incorporated by reference to Exhibit 10.2 of the Company's Current Report on Form 8-K, filed on April 29, 2013).
10.3*

 
Form of Indemnification Agreement by and between the Company and directors of Ocera Subsidiary (f/k/a Ocera Therapeutics, Inc.) appointed to the Company's Board of Directors and officers of Ocera Subsidiary (f/k/a Ocera Therapeutics, Inc.) appointed as officers of the Company in connection with the Merger.
10.4*

 
Letter agreement, dated September 12, 005, by and between Ocera Subsidiary, Inc. (f/k/a Ocera Therapeutics, Inc.) and Dana S. McGowan regarding employment.
10.5*

 
Letter agreement, dated June 7, 2012, by and between the Company and Linda Grais, M.D., regarding employment.
10.6*

 
2005 Stock Plan of Ocera Therapeutics, Inc. (n/k/a Ocera Subsidiary, Inc.), as amended (the “2005 Plan”).
10.7*

 
Form of Notice of Stock Option Grant (Traditional Vesting) pursuant to the 2005 Plan.
10.8*

 
Form of Notice of Stock Option Grant (Single Trigger) pursuant to the 2005 Plan.
10.9*

 
Form of Notice of Stock Option Grant (Double Trigger) pursuant to 2005 Plan.
31.1*
 
Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*
 
Certification of Principal Accounting Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

45




32.1**
 
Certification of Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2**
 
Certification of Principal Accounting Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS+
 
XBRL Instance Document
101.SCH+
 
XBRL Taxonomy Extension Schema Document
101.CAL+
 
XBRL Taxonomy  Calculation Linkbase Document
101.LAB+
 
XBRL Taxonomy Label Linkbase Document
101.PRE+
 
XBRL Taxonomy Presentation Linkbase Document
101.DEF+
 
XBRL Taxonomy Definitions Linkbase Document


___________________________________________________________________________________________
 
*Filed herewith
**Furnished herewith
#Portions of these exhibits have been omitted pursuant to a request for confidential treatment submitted to the Securities and Exchange Commission.
 
+ Attached as Exhibits 101 to this report are the following financial statements from our Quarterly Report on Form 10-Q for the quarter ended June 30, 2013 , formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Comprehensive Income, (iii) the Consolidated Statements of Cash Flows and (iv) related notes to these financial statements tagged as blocks of text.
 
The XBRL related information in Exhibits 101 to this Quarterly Report on Form 10-Q shall not be deemed “filed” or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended (“Securities Act”) and is not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (“Exchange Act”), or otherwise subject to the liabilities of those sections.

46



SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
OCERA THERAPEUTICS, INC.
(Registrant)
 
Date:
August 14, 2013
By:
/s/ Linda S. Grais, M.D.
 
 
 
Linda S. Grais, M.D.
 
 
 
President and Chief Executive Officer
 
 
 
(Principal Executive Officer)
 
 
 
 
Date:
August 14, 2013
By:
/s/ Dana S. McGowan
 
 
 
Dana S. McGowan
 
 
 
Chief Financial Officer
 
 
 
(Principal Financial Officer)

47


CERTIFICATE OF AMENDMENT OF
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF
TRANZYME, INC.
PURSUANT TO SECTION 242 OF THE
GENERAL CORPORATION LAW OF THE STATE OF DELAWARE
Tranzyme, Inc., a Delaware corporation (the " Corporation "), hereby certifies as follows:
The Board of Directors of the Corporation (the " Board "), pursuant to Section 242 of the Delaware General Corporations Law (" DGCL "), has duly adopted a resolution setting forth the following proposed amendment (the " Amendment ") to the Corporation's certificate of incorporation as currently in effect (the " Certificate of Incorporation ") and declaring such amendment advisable, and the stockholders of the Corporation have duly approved and adopted the Amendment at a special meeting of stockholders called and held upon notice in accordance with Section 222 and Section 242 of the DGCL.
In order to effect such proposed amendment, ARTICLE I of the Certificate of Incorporation is hereby amended, effective upon the "Effective Time" (as defined in the Certificate of Incorporation), by deleting ARTICLE I in its entirety and inserting the following paragraph in lieu thereof:
"The name of the Corporation is Ocera Therapeutics, Inc."
IN WITNESS WHEREOF, this Certificate of Amendment has been executed by a duly authorized officer of the Corporation on this 15th day of July, 2013.
 
 
 
 
 
 
 
TRANZYME, INC.
 
 
 
By:
 
/s/ Vipin K. Garg

 
 
 
 
Vipin K. Garg, PhD
 
 
 
 
President and Chief Executive Officer








CERTIFICATE OF AMENDMENT OF
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF
TRANZYME, INC.
PURSUANT TO SECTION 242 OF THE
GENERAL CORPORATION LAW OF THE STATE OF DELAWARE
Tranzyme, Inc., a Delaware corporation (the " Corporation "), hereby certifies as follows:
The Board of Directors of the Corporation (the " Board "), pursuant to Section 242 of the Delaware General Corporations Law (" DGCL "), has duly adopted a resolution setting forth the following proposed amendment (the " Amendment ") to the Corporation's certificate of incorporation as currently in effect (the " Certificate of Incorporation ") and declaring such amendment advisable, and the stockholders of the Corporation have duly approved and adopted the Amendment at a special meeting of stockholders called and held upon notice in accordance with Section 222 and Section 242 of the DGCL.
In order to effect such proposed amendment, on the date of filing of this Certificate of Amendment of the Certificate of Incorporation with the Secretary of State of the State of Delaware (the " Effective Time "), each twelve (12) (the " Conversion Number ") shares of the Corporation's common stock, par value $0.00001 (the "Common Stock") (including treasury shares) issued and outstanding as of the Effective Time shall be reclassified and combined into one validly issued, fully paid and non-assessable share of Common Stock, automatically and without any action by the holder thereof (the " Reverse Stock Split "). The par value of the Common Stock following the Reverse Stock Split shall remain at $0.00001 per share. No fractional shares of Common Stock shall be issued as a result of the Reverse Stock Split. In lieu of any fractional shares to which a stockholder would otherwise be entitled (after taking into account all fractional shares of Common Stock otherwise issuable to such holder), the Corporation shall, upon surrender of such holder's certificate(s) representing such fractional shares of Common Stock, pay cash in an amount equal to such fractional shares of Common Stock multiplied by the then fair value of the Common Stock as determined by the Board of Directors.
Each stock certificate that, immediately prior to the Effective Time, represented shares of Common Stock that were issued and outstanding immediately prior to the Effective Time shall, from and after the Effective Time, automatically and without the necessity of presenting the same for exchange, represent that number of whole shares of Common Stock after the Effective Time into which the shares formerly represented by such certificate have been reclassified and combined (as well as the right to receive cash in lieu of fractional shares of Common Stock after the Effective Time); provided, however, that each person of record holding a certificate that represented shares of Common Stock that were issued and outstanding immediately prior to the Effective Time shall receive, upon surrender of such certificate, a new certificate evidencing and representing the number of whole shares of Common Stock after the Effective Time into which the shares of Common Stock formerly represented by such certificate shall have been reclassified.
IN WITNESS WHEREOF, this Certificate of Amendment has been executed by a duly authorized officer of the Corporation on this 15th day of July, 2013.
 
 
 
 
 
 
 
TRANZYME, INC.
 
 
By:
 
 
/s/ Vipin K. Garg

 
 
 
 
Vipin K. Garg, PhD
 
 
 
 
President and Chief Executive Officer






EIGHTH AMENDED AND RESTATED

CERTIFICATE OF INCORPORATION

OF

TRANZYME, INC.

Tranzyme, Inc., a corporation organized and existing under the laws of the State of Delaware (the “ Corporation ”), hereby certifies as follows:

1. The name of the Corporation is Tranzyme, Inc. The date of the filing of its original Certificate of Incorporation with the Secretary of State of the State of Delaware was January 12, 1998 (the “ Original Certificate ”). The Original Certificate was amended on December 2, 1999 and amended and restated in its entirety on March 10, 2000 (the “ First Amended and Restated Certificate ”). The First Amended and Restated Certificate was amended and restated in its entirety on May 30, 2003 (the “ Second Amended and Restated Certificate ”). The Second Amended and Restated Certificate was amended and restated in its entirety on December 17, 2003 (the “ Third Amended and Restated Certificate ”). The Third Amended and Restated Certificate was amended and restated in its entirety on May 12, 2005 (the “ Fourth Amended and Restated Certificate ”). The Fourth Amended and Restated Certificate was amended and restated in its entirety on October 25, 2007 (the “ Fifth Amended and Restated Certificate ”). The Fifth Amended and Restated Certificate was amended and restated in its entirety on June 15, 2010 (the “ Sixth Amended and Restated Certificate ”). The Sixth Amended and Restated Certificate was amended and restated in its entirety on March 31, 2011 (the “ Seventh Amended and Restated Certificate ”).

2.    This Eighth Amended and Restated Certificate of Incorporation (this “ Certificate ”) amends, restates and integrates the provisions of the Seventh Amended and Restated Certificate, and was duly adopted in accordance with the provisions of Sections 228, 242 and 245 of the General Corporation Law of the State of Delaware (the “ DGCL ”).

3.    The text of the Seventh Amended and Restated Certificate is hereby amended and restated in its entirety to provide as herein set forth in full.
ARTICLE I
The name of the Corporation is Tranzyme, Inc.
ARTICLE II     
The address of the Corporation’s registered office in the State of Delaware is c/o The Corporation Trust Company, 1209 Orange Street in the City of Wilmington, County of New Castle. The name of its registered agent at such address is The Corporation Trust Company.






ARTICLE III     
The purpose of the Corporation is to engage in any lawful act or activity for which corporations may be organized under the DGCL.

ARTICLE IV     

CAPITAL STOCK
The total number of shares of capital stock which the Corporation shall have authority to issue is one hundred five million (105,000,000), of which (i) one hundred million (100,000,000) shares shall be a class designated as common stock, par value $0.00001 per share (the “ Common Stock ”), and (ii) five million (5,000,000) shares shall be a class designated as undesignated preferred stock, par value $0.00001 per share (the “ Undesignated Preferred Stock ”).

Except as otherwise provided in any certificate of designations of any series of Undesignated Preferred Stock, the number of authorized shares of the class of Common Stock or Undesignated Preferred Stock may from time to time be increased or decreased (but not below the number of shares of such class outstanding) by the affirmative vote of the holders of a majority in voting power of the outstanding shares of capital stock of the Corporation irrespective of the provisions of Section 242(b)(2) of the DGCL.

The powers, preferences and rights of, and the qualifications, limitations and restrictions upon, each class or series of stock shall be determined in accordance with, or as set forth below in, this Article IV.

A. COMMON STOCK

Subject to all the rights, powers and preferences of the Undesignated Preferred Stock and except as provided by law or in this Certificate (or in any certificate of designations of any series of Undesignated Preferred Stock):

(a)    the holders of the Common Stock shall have the exclusive right to vote for the election of directors of the Corporation (the “ Directors ”) and on all other matters requiring stockholder action, each outstanding share entitling the holder thereof to one vote on each matter properly submitted to the stockholders of the Corporation for their vote; provided , however , that, except as otherwise required by law, holders of Common Stock, as such, shall not be entitled to vote on any amendment to this Certificate (or on any amendment to a certificate of designations of any series of Undesignated Preferred Stock) that alters or changes the powers, preferences, rights or other terms of one or more outstanding series of Undesignated Preferred Stock if the holders of such affected series of Undesignated Preferred Stock are entitled to vote, either separately or together with the holders of one or more other such series, on such amendment pursuant to this Certificate (or pursuant to a certificate of designations of any series of Undesignated Preferred Stock) or pursuant to the DGCL;


2




(b)    dividends may be declared and paid or set apart for payment upon the Common Stock out of any assets or funds of the Corporation legally available for the payment of dividends, but only when and as declared by the Corporation’s board of directors (the “ Board of Directors ”) or any authorized committee thereof; and

(c)    upon the voluntary or involuntary liquidation, dissolution or winding up of the Corporation, the net assets of the Corporation shall be distributed pro rata to the holders of the Common Stock.

B. UNDESIGNATED PREFERRED STOCK

The Board of Directors or any authorized committee thereof is expressly authorized, to the fullest extent permitted by law, to provide by resolution or resolutions for, out of the unissued shares of Undesignated Preferred Stock, the issuance of the shares of Undesignated Preferred Stock in one or more series of such stock, and by filing a certificate of designations pursuant to applicable law of the State of Delaware, to establish or change from time to time the number of shares of each such series, and to fix the designations, powers, including voting powers, full or limited, or no voting powers, preferences and the relative, participating, optional or other special rights of the shares of each series and any qualifications, limitations and restrictions thereof.
ARTICLE V     
STOCKHOLDER ACTION
1.     Action without Meeting . Any action required or permitted to be taken by the stockholders of the Corporation at any annual or special meeting of stockholders of the Corporation must be effected at a duly called annual or special meeting of stockholders and may not be taken or effected by a written consent of stockholders in lieu thereof.

2.     Special Meetings . Except as otherwise required by statute and subject to the rights, if any, of the holders of any series of Undesignated Preferred Stock, special meetings of the stockholders of the Corporation may be called only by the Board of Directors acting pursuant to a resolution approved by the affirmative vote of a majority of the Directors then in office, and special meetings of stockholders may not be called by any other person or persons. Only those matters set forth in the notice of the special meeting may be considered or acted upon at a special meeting of stockholders of the Corporation.
ARTICLE VI     


3



DIRECTORS

1.      General . The business and affairs of the Corporation shall be managed by or under the direction of the Board of Directors except as otherwise provided herein or required by law.

2.      Election of Directors . Election of Directors need not be by written ballot unless the By‑laws of the Corporation (the “ By-laws ”) shall so provide.

3.      Number of Directors; Term of Office . The number of Directors of the Corporation shall be fixed solely and exclusively by resolution duly adopted from time to time by the Board of Directors. At each annual meeting of stockholders, Directors elected to succeed those Directors whose terms expire shall be elected for a term of office to expire at the succeeding annual meeting of stockholders after their election. Notwithstanding the foregoing, the elected Directors shall hold office until their successors are duly elected and qualified or until their earlier resignation, death or removal.

Notwithstanding the foregoing, whenever, pursuant to the provisions of Article IV of this Certificate, the holders of any one or more series of Undesignated Preferred Stock shall have the right, voting separately as a series or together with holders of other such series, to elect Directors at an annual or special meeting of stockholders, the election, term of office, filling of vacancies and other features of such directorships shall be governed by the terms of this Certificate and any certificate of designations applicable to such series.

4.      Vacancies . Subject to the rights, if any, of the holders of any series of Undesignated Preferred Stock to elect Directors and to fill vacancies in the Board of Directors relating thereto, any and all vacancies in the Board of Directors, however occurring, including, without limitation, by reason of an increase in the size of the Board of Directors, or the death, resignation, disqualification or removal of a Director, shall be filled solely and exclusively by the affirmative vote of a majority of the remaining Directors then in office, even if less than a quorum of the Board of Directors, and not by the stockholders. Any Director appointed in accordance with the preceding sentence shall hold office for the remainder of the term in which the new directorship was created or the vacancy occurred and until such Director’s successor shall have been duly elected and qualified or until his or her earlier resignation, death or removal. In the event of a vacancy in the Board of Directors, the remaining Directors, except as otherwise provided by law, shall exercise the powers of the full Board of Directors until the vacancy is filled.

5.      Removal . Subject to the rights, if any, of any series of Undesignated Preferred Stock to elect Directors and to remove any Director whom the holders of any such series have the right to elect, any Director (including persons elected by Directors to fill vacancies in the


4



Board of Directors) may be removed from office (i) only with cause and (ii) only by the affirmative vote of the holders of 75% or more of the outstanding shares of capital stock then entitled to vote at an election of Directors. At least forty-five (45) days prior to any annual or special meeting of stockholders at which it is proposed that any Director be removed from office, written notice of such proposed removal and the alleged grounds thereof shall be sent to the Director whose removal will be considered at the meeting.
ARTICLE VII     
LIMITATION OF LIABILITY
A Director of the Corporation shall not be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a Director, except for liability (a) for any breach of the Director’s duty of loyalty to the Corporation or its stockholders, (b) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (c) under Section 174 of the DGCL or (d) for any transaction from which the Director derived an improper personal benefit. If the DGCL is amended after the effective date of this Certificate to authorize corporate action further eliminating or limiting the personal liability of Directors, then the liability of a Director of the Corporation shall be eliminated or limited to the fullest extent permitted by the DGCL, as so amended.

Any amendment, repeal or modification of this Article VII by either of (i) the stockholders of the Corporation or (ii) an amendment to the DGCL, shall not adversely affect any right or protection existing at the time of such amendment, repeal or modification with respect to any acts or omissions occurring before such amendment, repeal or modification of a person serving as a Director at the time of such amendment, repeal or modification.
ARTICLE VIII     
AMENDMENT OF BY-LAWS
1.      Amendment by Directors . Except as otherwise provided by law, the By‑laws of the Corporation may be amended or repealed by the Board of Directors by the affirmative vote of a majority of the Directors then in office.

2.      Amendment by Stockholders . The By‑laws of the Corporation may be amended or repealed at any annual meeting of stockholders, or special meeting of stockholders called for such purpose, by the affirmative vote of at least 75% of the outstanding shares of capital stock entitled to vote on such amendment or repeal, voting together as a single class; provided , however , that if the Board of Directors recommends that stockholders approve such amendment or repeal at such meeting of stockholders, such amendment or repeal shall only require the affirmative vote of the majority of the outstanding shares of capital stock entitled to vote on such amendment or repeal, voting together as a single class.
ARTICLE IX     


5



AMENDMENT OF CERTIFICATE OF INCORPORATION
The Corporation reserves the right to amend or repeal this Certificate in the manner now or hereafter prescribed by statute and this Certificate, and all rights conferred upon stockholders herein are granted subject to this reservation. Whenever any vote of the holders of capital stock of the Corporation is required to amend or repeal any provision of this Certificate, and in addition to any other vote of holders of capital stock that is required by this Certificate or by law, such amendment or repeal shall require the affirmative vote of the majority of the outstanding shares of capital stock entitled to vote on such amendment or repeal, and the affirmative vote of the majority of the outstanding shares of each class entitled to vote thereon as a class, at a duly constituted meeting of stockholders called expressly for such purpose; provided , however , that the affirmative vote of not less than 75% of the outstanding shares of capital stock entitled to vote on such amendment or repeal, and the affirmative vote of not less than 75% of the outstanding shares of each class entitled to vote thereon as a class, shall be required to amend or repeal any provision of Article V, Article VI, Article VII, Article VIII or Article IX of this Certificate.

[End of Text]



6



THIS EIGHTH AMENDED AND RESTATED CERTIFICATE OF INCORPORATION is executed as of this 6th day of March, 2011.


TRANZYME, INC.


By: /s/ Vipin K. Garg, Ph.D.    
Name: Vipin K. Garg, Ph.D.    
Title: President and Chief Executive Officer    




THIS WARRANT AND THE SECURITIES ISSUABLE UPON EXERCISE HEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933. SUCH SECURITIES AND ANY SECURITIES OR SHARES ISSUED HEREUNDER MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED, HYPOTHECATED, OR OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 OR, IF REQUESTED BY THE COMPANY, AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT REGISTRATION IS NOT REQUIRED UNDER SUCH ACT.

OCERA THERAPEUTICS, INC.

COMMON STOCK PURCHASE WARRANT
This Common Stock Purchase Warrant (the “ Warrant ”) is issued as of March 30, 2012, by Ocera Therapeutics, Inc., a Delaware corporation (the Company ”), to ________________, or its assigns (the “ Holder ”). This Warrant is one of a series of Warrants being issued in connection with the sale of Convertible Promissory Notes (the “ Notes ”) being sold pursuant to the terms of that certain Note and Warrant Purchase Agreement dated as of March 30, 2012 among the Company, the Holder and the other Lenders listed on Exhibit I thereto (the “ Purchase Agreement ”). Any capitalized terms used, but not defined, herein shall have the meaning therefor set forth in the Notes.

1.
Issuance of Warrant; Number of Shares; Term; Price
1.1      Issuance . The Company, for value received, hereby certifies that the Holder is entitled, subject to the terms set forth below, to purchase from the Company, during the Term (as defined below), the number of shares of common stock, par value $0.001 per share, of the Company (“ Common Stock ”) as may be determined in accordance with Section 1.2 below, at an exercise price per share equal to $ Eight Cents ($.08) . Such exercise price per share, as adjusted from time to time pursuant to the provisions of this Warrant, is hereinafter referred to as the “ Exercise Price ”.
1.2      Number of Shares . Subject to the terms and conditions hereinafter set forth, the Holder is entitled, upon surrender of this Warrant, to purchase from the Company a number of shares of Common Stock (subject to adjustment as provided herein) to be calculated as follows:
(a)      In the event that, on or before June 30, 2012, a term sheet for a Change of Control transaction or a Strategic Transaction is executed by the Company and (i) in the case of a Change of Control transaction, the potential acquiror in the Change of Control transaction or (ii) in the case of a Strategic Transaction, the potential strategic partner (the date of receipt by the Company of the first signed term sheet for either a Change of Control or a Strategic Transaction is herein referred to as the “ Special Condition Date ”), then this Warrant shall entitle the Holder to purchase that number of shares of the Common Stock as is equal to (A) thirty percent (30%) of the original, aggregate principal amount of the Note(s) issued to the Holder pursuant to the Purchase Agreement divided by (B)(i) the Series C Price in effect on the Special Condition Date or (ii) if, on or prior to the Special Condition Date, the Company consummates an initial closing of a Next Financing or a Non-Qualified Financing, then the price at which the equity securities were issued in the first to occur thereof, provided such price is lower than the Series C Price in effect on the Special Condition Date.
(b)      In the event that, on or before June 30, 2012, the Company and a potential acquiror or potential strategic partner (as provided under clause 1.2(a)(i) and/or (ii) above) do not execute a term sheet providing for (i) a Change of Control or (ii) a Strategic Transaction, then this Warrant shall entitle the Holder to purchase that number of shares of the Common Stock as is equal to (A) seventy-five percent (75%) of the original, aggregate principal amount of the Note(s) issued to the Holder pursuant to the Purchase Agreement divided by (B)(i) the Series C Price in effect on June 30, 2012 or (ii) if, on or prior to June 30, 2012, the Company consummates an initial closing of a Next Financing or a Non-Qualified Financing, then the price at which the equity securities were issued in the first to occur thereof, provided such price is lower than the Series C Price in effect on June 30, 2012.
(c)      Shares ” shall mean the shares of Common Stock issuable upon exercise of this Warrant.
1.3      Term . This Warrant shall be exercisable at any time and from time to time as a whole or in part (a) from the earlier of (i) the Special Condition Date or (ii) June 30, 2012 and (b) until the earliest to occur of (i) the date that is seven (7) years from the issue date of this Warrant referenced above, (ii) the date of the closing of the initial public offering of the Common Stock pursuant to a registration statement under the Securities Act of 1933, as amended, or (iii) the date of consummation of a Change of Control transaction in which the consideration to the Company (or its stockholders) consists of cash or freely and immediately tradable securities. The period during which this Warrant shall be exercisable is herein referred to as the “ Term .”
1.4      Notice of Events . If the Company proposes to conduct an event specified in clause (b)(ii) or clause (b)(iii) of Section 1.3 above, the Company shall give the Holder at least thirty (30) days prior written notice of the date on which such event is to be consummated. To the extent this Warrant is not exercised on or before the consummation of such event, this Warrant shall terminate and be of no further force or effect as of the consummation of such event.
2.      Reservation of Shares . The Company hereby covenants and agrees that, at all times during the period this Warrant is exercisable, the Company shall reserve from its authorized and unissued shares such number of shares of its Common Stock as shall be required for issuance and delivery upon the exercise of this Warrant. The Company agrees that its issuance of this Warrant shall constitute full authority to its officers who are charged with the duty of executing stock certificates to execute and issue the necessary certificates for Shares upon the exercise of this Warrant.
3.      No Fractional Shares . No fractional shares of Common Stock will be issued in connection with any subscription hereunder. In lieu of any fractional shares that would otherwise be issuable, the Company shall pay cash equal to the product of such fraction multiplied by the Market Price of one share of Common Stock on the date of exercise, as determined pursuant to Section 6.3 hereof.
4.      No Shareholder Rights . This Warrant as such shall not entitle its holder to any of the rights of a stockholder of the Company until the holder has exercised this Warrant in accordance with Section 5 or Section 6 hereof.
5.      Exercise of Warrant . This Warrant may be exercised during the Term by the Holder as a whole or in part by the surrender of this Warrant at the principal office of the Company, accompanied by payment in full of the purchase price of the shares purchased thereby, as described above or pursuant to Section 6. This Warrant shall be deemed to have been exercised immediately prior to the close of business on the date of its surrender for exercise as provided above, and the person or entity entitled to receive the shares or other securities issuable upon such exercise shall be treated for all purposes as the holder of such shares of record as of the close of business on such date. As promptly as practicable, the Company shall issue and deliver to the person or entity entitled to receive the same a certificate or certificates for the number of full shares of Common Stock issuable upon such exercise, together with cash in lieu of any fraction of a share as provided above. The shares of Common Stock issuable upon exercise hereof shall, upon their issuance in accordance with this Warrant, be fully paid and nonassessable. If this Warrant shall be exercised in part only, the Company shall, at the time of delivery of the certificate representing the Shares or other securities in respect of which this Warrant has been exercised, deliver to the Holder a new Warrant evidencing the right to purchase the remaining Shares or other securities purchasable under this Warrant, which new warrant shall, in all other respects, be identical to this Warrant.
6.
Net Issue .
6.1      Right to Convert . In addition to and without limiting the rights of the Holder under the terms of this Warrant, during the Term, the Holder shall have the right to convert this Warrant or any portion hereof (the “ Conversion Right ”) into shares of Common Stock as provided in this Section 6. Upon exercise of the Conversion Right with respect to a particular number of shares subject to this Warrant (the “ Converted Warrant Shares ”), the Company shall deliver to the Holder (without payment by the Holder of any cash or other consideration) that number of shares of Common Stock equal to the quotient obtained by dividing (x) the value of this Warrant (or the specified portion hereof) on the Conversion Date (as defined in subsection 6.2 hereof), which value shall be determined by subtracting (A) the aggregate Exercise Price of the Converted Warrant Shares immediately prior to the exercise of the Conversion Right from (B) the aggregate Market Price (as defined herein) of the Converted Warrant Shares issuable upon exercise of this Warrant (or the specified portion hereof) on the Conversion Date (as herein defined) by (y) the Market Price (as defined herein) of one share of Common Stock on the Conversion Date (as herein defined). No fractional shares shall be issuable upon exercise of the Conversion Right, and if the number of shares to be issued determined in accordance with the foregoing formula is other than a whole number, the Company shall pay to the Holder an amount in cash equal to the fair market value of the resulting fractional share on the Conversion Date.
6.2      Method of Exercise . During the Term, the Conversion Right may be exercised by the Holder by the surrender of this Warrant at the principal office of the Company together with a written statement specifying that the Holder thereby intends to exercise the Conversion Right and indicating the number of shares subject to this Warrant that are being surrendered (referred to in subsection 6.1 hereof as the Converted Warrant Shares) in exercise of the Conversion Right. Such conversion shall be effective upon such surrender of this Warrant (the “ Conversion Date ”). Certificates for the shares of Common Stock issuable upon exercise of the Conversion Right shall be issued as of the Conversion Date and shall be delivered to the Holder immediately following the Conversion Date, or, if requested at the time of surrender of this Warrant, held for pick-up by the Holder at the Company’s principal office.
6.3      Determination of Fair Market Value . For purposes of Section 3 and this Section 6, fair market value (the “ Market Price ”) of a Converted Warrant Share or share of Common Stock, as applicable, as of a particular date (the “ Determination Date ”) shall mean, where such security is listed on a security exchange at the time of exercise, the average of the closing prices of such security’s sales on the principal securities exchanges on which such security may at the time be listed, or, if there has been no sales on any such exchange on any day, the average of the highest bid and lowest asked prices on all such exchanges at the end of such day, or, if on any day such security is not so listed, the average of the last sale prices quoted in the Nasdaq System, or if on any day such security is not quoted in the Nasdaq System, the average of the highest bid and lowest asked prices on such day in the domestic over-the-counter market as reported by the National Quotation Bureau, Incorporated, or any similar successor organization, in each such case averaged over a period of five (5) days consisting of the day prior to the day as of which “Market Price” is being determined and the four (4) consecutive business days prior to such day. If at any time such security is not listed on any securities exchange or quoted in the Nasdaq System or the over-the-counter market, the “Market Price” shall be the fair value thereof as determined in good faith by the Company’s Board of Directors.
6.4      Net Issue upon Change of Control Transaction . If the Company consummates a Change of Control transaction in which the consideration to the Company (or its stockholders) consists of cash or freely and immediately tradable securities, and the Market Price is greater than the Exercise Price upon the consummation of such Change of Control transaction, then this Warrant shall be automatically fully exercised pursuant to this Section 6 immediately prior to the consummation of such Change of Control transaction.
7.      Adjustment of Exercise Price and Number of Shares . The number of and kind of securities purchasable upon exercise of this Warrant and the Exercise Price shall be subject to adjustment from time to time as follows:
7.1      Subdivisions, Combinations and Other Issuances . If the Company shall at any time prior to the expiration of this Warrant subdivide the Common Stock, by split‑up or otherwise, or combine the Common Stock, or issue additional shares of the Common Stock as a dividend, the number of Common Stock issuable on the exercise of this Warrant shall forthwith be proportionately increased in the case of a subdivision or stock dividend, or proportionately decreased in the case of a combination. Appropriate adjustments shall also be made to the purchase price payable per share, but the aggregate purchase price payable for the total number of shares of Common Stock purchasable under this Warrant (as adjusted) shall remain the same. Any adjustment under this Section 7.1 shall become effective at the close of business on the date the subdivision or combination becomes effective, or as of the record date of such dividend, or in the event that no record date is fixed, upon the making of such dividend.
7.2      Reclassification, Reorganization and Consolidation . In case of any reclassification, capital reorganization, or change in the capital stock of the Company (other than as a result of a subdivision, combination, or stock dividend provided for in Section 7.1 above), then the Company shall make appropriate provision so that the Holder shall have the right at any time prior to the expiration of this Warrant to purchase, at a total price equal to that payable upon the exercise of this Warrant, the kind and amount of shares of stock and other securities and property receivable in connection with such reclassification, reorganization, or change by a holder of the same number of Shares as were purchasable by the Holder immediately prior to such reclassification, reorganization, or change. In any such case appropriate provisions shall be made with respect to the rights and interest of the Holder so that the provisions hereof shall thereafter be applicable with respect to any shares of stock or other securities and property deliverable upon exercise hereof, and appropriate adjustments shall be made to the purchase price per share payable hereunder, provided the aggregate purchase price shall remain the same.
7.3      Notice of Adjustment . When any adjustment is required to be made in the number or kind of shares purchasable upon exercise of the Warrant, or in the Exercise Price, the Company shall promptly notify the Holder of such event and of the number of Shares or other securities or property thereafter purchasable upon exercise of this Warrant.
8.      Non-Assignable . This Warrant may not be transferred or assigned, as a whole or in part, without the prior consent of the Company and the Majority Lenders (as defined in the Purchase Agreement) and compliance with applicable federal and state securities laws, except (assuming compliance with applicable federal and state securities laws) in connection with an assignment as a whole or in part to an affiliate of the Holder or to a successor corporation to the Holder resulting from a merger or consolidation of the Holder with or into another corporation or the sale of all or substantially all of the Holder’s properties and assets. Effective upon any such assignment, each person or entity to whom this Warrant was assigned shall have and exercise the Holder’s rights, interest and obligations hereunder to the extent assigned to such person or entity by the Holder as if such person or entity were the original Holder of such portion of this Warrant as is assigned to such person or entity. Subject to the foregoing, this Warrant shall be binding upon any successors or assigns of the Company.
9.      Replacement of Warrants . Upon receipt by the Company of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of the Warrant, and in the case of any such loss, theft or destruction of the Warrant, on delivery of an indemnity agreement or security reasonably satisfactory in form and amount to the Company, and reimbursement to the Company of all reasonable expenses incidental thereto, and upon surrender and cancellation of the Warrant if mutilated, the Company will execute and deliver, in lieu thereof, a new Warrant of like tenor.
10.      Miscellaneous . This Warrant shall be governed by and construed under the laws of the State of California. The headings in this Warrant are for purposes of convenience of reference only, and shall not be deemed to constitute a part hereof. The invalidity or unenforceability of any provision hereof shall in no way affect the validity or enforceability of any other provisions. All notices and other communications from the Company to the holder of this Warrant shall be given in writing and shall be deemed effectively given as provided in the Purchase Agreement.
11.      Taxes . The Company shall pay all issue taxes and other governmental charges (but not including any income taxes of a Holder) that may be imposed in respect of the issuance or delivery of the Shares or any portion thereof.
12.      Amendment . Any term of this Warrant may be amended or waived only with the written consent of the Company and the Majority Lenders. The Holder further acknowledges and agrees that any determinations hereunder made by the Majority Lenders shall be binding upon the Holder and all other holders of the Warrants.
13.      Remedies . In the event of any default by the Company in the performance of or observance with any of the terms of this Warrant, it is agreed that remedies at law are not and will not be adequate for the Holder and that such terms may be specifically enforced by a decree for the specific performance of any agreement contained herein or by an injunction against a violation of any of the terms hereof or otherwise.
14.      Facsimile Signature; Counterparts . This Warrant may be executed by the Company and/or the Holder in facsimile or other electronic form and upon receipt by the other party of such faxed or electronic executed copy of this Warrant, this Warrant shall be binding upon and enforceable against such other party in accordance with its terms. This Warrant may be executed in any number of counterparts, each of which shall be deemed an original and all of which together shall constitute a single agreement.
[Signatures follow on the next page]
IN WITNESS WHEREOF, the undersigned officer of the Company has set his hand as of the date first above written.
COMPANY:
OCERA THERAPEUTICS, INC.

By:                             
Laurent Fischer,
President and Chief Executive Officer
ACCEPTED, ACKNOWLEDGED
AND AGREED TO THIS
___________ DAY OF ______________, 2012.
HOLDER:
[NAME]


By:                             
        




GDSVF&H\ US_ACTIVE-108717438.3-DGUNNY     
US_ACTIVE-108717438.1-DGUNNY


THIS WARRANT AND THE SECURITIES ISSUABLE UPON EXERCISE HEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933. SUCH SECURITIES AND ANY SECURITIES OR SHARES ISSUED HEREUNDER MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED, HYPOTHECATED, OR OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 OR, IF REQUESTED BY THE COMPANY, AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT REGISTRATION IS NOT REQUIRED UNDER SUCH ACT.

OCERA THERAPEUTICS, INC.

COMMON STOCK PURCHASE WARRANT
This Common Stock Purchase Warrant (the “ Warrant ”) is issued as of October 1, 2012, by Ocera Therapeutics, Inc., a Delaware corporation (the “ Company ”), to ________________, or its assigns (the “ Holder ”). This Warrant is one of a series of Warrants being issued in connection with the sale of Convertible Promissory Notes (the “ Notes ”) being sold pursuant to the terms of that certain Note and Warrant Purchase Agreement dated as of March 30, 2012 among the Company, the Holder and the other Lenders listed on Exhibit I thereto, as amended by that certain Amendment to Note and Warrant Purchase Agreement and Approval of Subsequent Closing, dated as of October 1, 2012 (collectively, the “ Purchase Agreement ”). Any capitalized terms used, but not defined, herein shall have the meaning therefor set forth in the Notes.

1.
Issuance of Warrant; Number of Shares; Term; Price
1.1      Issuance . The Company, for value received, hereby certifies that the Holder is entitled, subject to the terms set forth below, to purchase from the Company, during the Term (as defined below), the number of shares of common stock, par value $0.001 per share, of the Company (“ Common Stock ”) as may be determined in accordance with Section 1.2 below, at an exercise price per share equal to Eight Cents ($0.08). Such exercise price per share, as adjusted from time to time pursuant to the provisions of this Warrant, is hereinafter referred to as the “ Exercise Price ”.
1.2      Number of Shares . Subject to the terms and conditions hereinafter set forth, the Holder is entitled, upon surrender of this Warrant, to purchase from the Company a number of shares of Common Stock (subject to adjustment as provided herein) equal to (A) seventy-five percent (75%) of the original, aggregate principal amount of the Note(s) issued to the Holder pursuant to the Purchase Agreement divided by (B) $2.04858 (representing the Series C Price in effect on June 30, 2012). “ Shares ” shall mean the shares of Common Stock issuable upon exercise of this Warrant.
1.3      Term . This Warrant shall be exercisable at any time and from time to time as a whole or in part (a) from the issue date of this Warrant referenced above and (b) until the earliest to occur of (i) the date that is seven (7) years from the issue date of this Warrant referenced above, (ii) the date of the closing of the initial public offering of the Common Stock pursuant to a registration statement under the Securities Act of 1933, as amended, or (iii) the date of consummation of a Change of Control transaction in which the consideration to the Company (or its stockholders) consists of cash or freely and immediately tradable securities. The period during which this Warrant shall be exercisable is herein referred to as the “ Term .”
1.4      Notice of Events . If the Company proposes to conduct an event specified in clause (b)(ii) or clause (b)(iii) of Section 1.3 above, the Company shall give the Holder at least thirty (30) days prior written notice of the date on which such event is to be consummated. To the extent this Warrant is not exercised on or before the consummation of such event, this Warrant shall terminate and be of no further force or effect as of the consummation of such event.
2.      Reservation of Shares . The Company hereby covenants and agrees that, at all times during the period this Warrant is exercisable, the Company shall reserve from its authorized and unissued shares such number of shares of its Common Stock as shall be required for issuance and delivery upon the exercise of this Warrant. The Company agrees that its issuance of this Warrant shall constitute full authority to its officers who are charged with the duty of executing stock certificates to execute and issue the necessary certificates for Shares upon the exercise of this Warrant.
3.      No Fractional Shares . No fractional shares of Common Stock will be issued in connection with any subscription hereunder. In lieu of any fractional shares that would otherwise be issuable, the Company shall pay cash equal to the product of such fraction multiplied by the Market Price of one share of Common Stock on the date of exercise, as determined pursuant to Section 6.3 hereof.
4.      No Shareholder Rights . This Warrant as such shall not entitle its holder to any of the rights of a stockholder of the Company until the holder has exercised this Warrant in accordance with Section 5 or Section 6 hereof.
5.      Exercise of Warrant . This Warrant may be exercised during the Term by the Holder as a whole or in part by the surrender of this Warrant at the principal office of the Company, accompanied by payment in full of the purchase price of the shares purchased thereby, as described above or pursuant to Section 6. This Warrant shall be deemed to have been exercised immediately prior to the close of business on the date of its surrender for exercise as provided above, and the person or entity entitled to receive the shares or other securities issuable upon such exercise shall be treated for all purposes as the holder of such shares of record as of the close of business on such date. As promptly as practicable, the Company shall issue and deliver to the person or entity entitled to receive the same a certificate or certificates for the number of full shares of Common Stock issuable upon such exercise, together with cash in lieu of any fraction of a share as provided above. The shares of Common Stock issuable upon exercise hereof shall, upon their issuance in accordance with this Warrant, be fully paid and nonassessable. If this Warrant shall be exercised in part only, the Company shall, at the time of delivery of the certificate representing the Shares or other securities in respect of which this Warrant has been exercised, deliver to the Holder a new Warrant evidencing the right to purchase the remaining Shares or other securities purchasable under this Warrant, which new warrant shall, in all other respects, be identical to this Warrant.
6.
Net Issue .
6.1      Right to Convert . In addition to and without limiting the rights of the Holder under the terms of this Warrant, during the Term, the Holder shall have the right to convert this Warrant or any portion hereof (the “ Conversion Right ”) into shares of Common Stock as provided in this Section 6. Upon exercise of the Conversion Right with respect to a particular number of shares subject to this Warrant (the “ Converted Warrant Shares ”), the Company shall deliver to the Holder (without payment by the Holder of any cash or other consideration) that number of shares of Common Stock equal to the quotient obtained by dividing (x) the value of this Warrant (or the specified portion hereof) on the Conversion Date (as defined in subsection 6.2 hereof), which value shall be determined by subtracting (A) the aggregate Exercise Price of the Converted Warrant Shares immediately prior to the exercise of the Conversion Right from (B) the aggregate Market Price (as defined herein) of the Converted Warrant Shares issuable upon exercise of this Warrant (or the specified portion hereof) on the Conversion Date (as herein defined) by (y) the Market Price (as defined herein) of one share of Common Stock on the Conversion Date (as herein defined). No fractional shares shall be issuable upon exercise of the Conversion Right, and if the number of shares to be issued determined in accordance with the foregoing formula is other than a whole number, the Company shall pay to the Holder an amount in cash equal to the fair market value of the resulting fractional share on the Conversion Date.
6.2      Method of Exercise . During the Term, the Conversion Right may be exercised by the Holder by the surrender of this Warrant at the principal office of the Company together with a written statement specifying that the Holder thereby intends to exercise the Conversion Right and indicating the number of shares subject to this Warrant that are being surrendered (referred to in subsection 6.1 hereof as the Converted Warrant Shares) in exercise of the Conversion Right. Such conversion shall be effective upon such surrender of this Warrant (the “ Conversion Date ”). Certificates for the shares of Common Stock issuable upon exercise of the Conversion Right shall be issued as of the Conversion Date and shall be delivered to the Holder immediately following the Conversion Date, or, if requested at the time of surrender of this Warrant, held for pick-up by the Holder at the Company’s principal office.
6.3      Determination of Fair Market Value . For purposes of Section 3 and this Section 6, fair market value (the “ Market Price ”) of a Converted Warrant Share or share of Common Stock, as applicable, as of a particular date (the “ Determination Date ”) shall mean, where such security is listed on a security exchange at the time of exercise, the average of the closing prices of such security’s sales on the principal securities exchanges on which such security may at the time be listed, or, if there has been no sales on any such exchange on any day, the average of the highest bid and lowest asked prices on all such exchanges at the end of such day, or, if on any day such security is not so listed, the average of the last sale prices quoted in the Nasdaq System, or if on any day such security is not quoted in the Nasdaq System, the average of the highest bid and lowest asked prices on such day in the domestic over-the-counter market as reported by the National Quotation Bureau, Incorporated, or any similar successor organization, in each such case averaged over a period of five (5) days consisting of the day prior to the day as of which “Market Price” is being determined and the four (4) consecutive business days prior to such day. If at any time such security is not listed on any securities exchange or quoted in the Nasdaq System or the over-the-counter market, the “Market Price” shall be the fair value thereof as determined in good faith by the Company’s Board of Directors.
6.4      Net Issue upon Change of Control Transaction . If the Company consummates a Change of Control transaction in which the consideration to the Company (or its stockholders) consists of cash or freely and immediately tradable securities, and the Market Price is greater than the Exercise Price upon the consummation of such Change of Control transaction, then this Warrant shall be automatically fully exercised pursuant to this Section 6 immediately prior to the consummation of such Change of Control transaction.
7.      Adjustment of Exercise Price and Number of Shares . The number of and kind of securities purchasable upon exercise of this Warrant and the Exercise Price shall be subject to adjustment from time to time as follows:
7.1      Subdivisions, Combinations and Other Issuances . If the Company shall at any time prior to the expiration of this Warrant subdivide the Common Stock, by split‑up or otherwise, or combine the Common Stock, or issue additional shares of the Common Stock as a dividend, the number of Common Stock issuable on the exercise of this Warrant shall forthwith be proportionately increased in the case of a subdivision or stock dividend, or proportionately decreased in the case of a combination. Appropriate adjustments shall also be made to the purchase price payable per share, but the aggregate purchase price payable for the total number of shares of Common Stock purchasable under this Warrant (as adjusted) shall remain the same. Any adjustment under this Section 7.1 shall become effective at the close of business on the date the subdivision or combination becomes effective, or as of the record date of such dividend, or in the event that no record date is fixed, upon the making of such dividend.
7.2      Reclassification, Reorganization and Consolidation . In case of any reclassification, capital reorganization, or change in the capital stock of the Company (other than as a result of a subdivision, combination, or stock dividend provided for in Section 7.1 above), then the Company shall make appropriate provision so that the Holder shall have the right at any time prior to the expiration of this Warrant to purchase, at a total price equal to that payable upon the exercise of this Warrant, the kind and amount of shares of stock and other securities and property receivable in connection with such reclassification, reorganization, or change by a holder of the same number of Shares as were purchasable by the Holder immediately prior to such reclassification, reorganization, or change. In any such case appropriate provisions shall be made with respect to the rights and interest of the Holder so that the provisions hereof shall thereafter be applicable with respect to any shares of stock or other securities and property deliverable upon exercise hereof, and appropriate adjustments shall be made to the purchase price per share payable hereunder, provided the aggregate purchase price shall remain the same.
7.3      Notice of Adjustment . When any adjustment is required to be made in the number or kind of shares purchasable upon exercise of the Warrant, or in the Exercise Price, the Company shall promptly notify the Holder of such event and of the number of Shares or other securities or property thereafter purchasable upon exercise of this Warrant.
8.      Non-Assignable . This Warrant may not be transferred or assigned, as a whole or in part, without the prior consent of the Company and the Majority Lenders (as defined in the Purchase Agreement) and compliance with applicable federal and state securities laws, except (assuming compliance with applicable federal and state securities laws) in connection with an assignment as a whole or in part to an affiliate of the Holder or to a successor corporation to the Holder resulting from a merger or consolidation of the Holder with or into another corporation or the sale of all or substantially all of the Holder’s properties and assets. Effective upon any such assignment, each person or entity to whom this Warrant was assigned shall have and exercise the Holder’s rights, interest and obligations hereunder to the extent assigned to such person or entity by the Holder as if such person or entity were the original Holder of such portion of this Warrant as is assigned to such person or entity. Subject to the foregoing, this Warrant shall be binding upon any successors or assigns of the Company.
9.      Replacement of Warrants . Upon receipt by the Company of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of the Warrant, and in the case of any such loss, theft or destruction of the Warrant, on delivery of an indemnity agreement or security reasonably satisfactory in form and amount to the Company, and reimbursement to the Company of all reasonable expenses incidental thereto, and upon surrender and cancellation of the Warrant if mutilated, the Company will execute and deliver, in lieu thereof, a new Warrant of like tenor.
10.      Miscellaneous . This Warrant shall be governed by and construed under the laws of the State of California. The headings in this Warrant are for purposes of convenience of reference only, and shall not be deemed to constitute a part hereof. The invalidity or unenforceability of any provision hereof shall in no way affect the validity or enforceability of any other provisions. All notices and other communications from the Company to the holder of this Warrant shall be given in writing and shall be deemed effectively given as provided in the Purchase Agreement.
11.      Taxes . The Company shall pay all issue taxes and other governmental charges (but not including any income taxes of a Holder) that may be imposed in respect of the issuance or delivery of the Shares or any portion thereof.
12.      Amendment . Any term of this Warrant may be amended or waived only with the written consent of the Company and the Majority Lenders. The Holder further acknowledges and agrees that any determinations hereunder made by the Majority Lenders shall be binding upon the Holder and all other holders of the Warrants.
13.      Remedies . In the event of any default by the Company in the performance of or observance with any of the terms of this Warrant, it is agreed that remedies at law are not and will not be adequate for the Holder and that such terms may be specifically enforced by a decree for the specific performance of any agreement contained herein or by an injunction against a violation of any of the terms hereof or otherwise.
14.      Facsimile Signature; Counterparts . This Warrant may be executed by the Company and/or the Holder in facsimile or other electronic form and upon receipt by the other party of such faxed or electronic executed copy of this Warrant, this Warrant shall be binding upon and enforceable against such other party in accordance with its terms. This Warrant may be executed in any number of counterparts, each of which shall be deemed an original and all of which together shall constitute a single agreement.

IN WITNESS WHEREOF, the undersigned officer of the Company has set her hand as of the date first above written.
COMPANY:
OCERA THERAPEUTICS, INC.



By:                             
Linda Grais, M.D.,
Chief Executive Officer

ACCEPTED, ACKNOWLEDGED
AND AGREED TO THIS
___________ DAY OF ______________, 2012.
HOLDER:
[NAME]


By:                             
        





US_ACTIVE-110638624


OCERA THERAPEUTICS, INC.

INDEMNIFICATION AGREEMENT

This Indemnification Agreement (“ Agreement ”) is made as of ___________ ____, 2013 by and between Ocera Therapeutics, Inc. (f/k/a Tranzyme, Inc.), a Delaware corporation (the “ Company ”), and _______________ (“ Indemnitee ”).

RECITALS

WHEREAS, the Company desires to attract and retain the services of highly qualified individuals, such as Indemnitee, to serve the Company;

WHEREAS, in order to induce Indemnitee to continue to provide services to the Company, the Company wishes to provide for the indemnification of, and advancement of expenses to, Indemnitee to the maximum extent permitted by law;
WHEREAS, the Bylaws of the Company (as the same may be amended, restated or otherwise modified from time to time, the “ Bylaws ”) require indemnification of the officers and directors of the Company, and Indemnitee may also be entitled to indemnification pursuant to the General Corporation Law of the State of Delaware (the “ DGCL ”);
WHEREAS, the Bylaws and the DGCL expressly provide that the indemnification provisions set forth therein are not exclusive, and thereby contemplate that contracts may be entered into between the Company and members of the board of directors, officers and other persons with respect to indemnification;
WHEREAS, the Company and Indemnitee recognize the continued difficulty in obtaining liability insurance for the Company’s directors, officers, employees, agents and fiduciaries, the significant and continual increases in the cost of such insurance and the general trend of insurance companies to reduce the scope of coverage of such insurance;
WHEREAS, the Company and Indemnitee further recognize the substantial increase in corporate litigation in general, subjecting directors, officers, employees, agents and fiduciaries to expensive litigation risks at the same time as the availability and scope of coverage of liability insurance provide increasing challenges for the Company;
WHEREAS, Indemnitee does not regard the protection currently provided by applicable law, the Company’s governing documents and available insurance as adequate under the present circumstances, and Indemnitee may not be willing to continue to serve in such capacity without additional protection;
WHEREAS, the Board of Directors of the Company (the “ Board ”) has determined that the increased difficulty in attracting and retaining highly qualified persons such as Indemnitee is detrimental to the best interests of the Company’s stockholders and that the Company should act to assure Indemnitee that there will be increased certainty of such protection in the future;
WHEREAS, it is reasonable, prudent and necessary for the Company contractually to obligate itself to indemnify, and to advance expenses on behalf of, such persons to the fullest extent permitted by applicable law, regardless of any amendment or revocation of the Company’s Certificate of Incorporation, as the same may be amended, restated or otherwise modified from time to time (the “ Charter ”) or Bylaws, so that they will serve or continue to serve the Company free from undue concern that they will not be so indemnified; and
WHEREAS, this Agreement is a supplement to and in furtherance of the indemnification provided in the Bylaws and any resolutions adopted pursuant thereto, and shall not be deemed a substitute therefor, nor to diminish or abrogate any rights of Indemnitee thereunder.
NOW, THEREFORE, in consideration of the premises and the covenants contained herein, the Company and Indemnitee do hereby covenant and agree as follows:
Section 1. Services to the Company . Indemnitee agrees to serve as an officer and/or director of the Company. Indemnitee may at any time and for any reason resign from such position (subject to any other contractual obligation or any obligation imposed by law), in which event the Company shall have no obligation under this Agreement to continue Indemnitee in such position. This Agreement shall not be deemed an employment contract between the Company (or any of its subsidiaries or any Enterprise) and Indemnitee. The foregoing notwithstanding, this Agreement shall continue in force after Indemnitee has ceased to serve as an officer and/or director of the Company.

Section 2. Definitions .

As used in this Agreement:

(a)    “ Corporate Status ” describes the status of a person as a current or former director, officer, employee, agent or trustee of the Company or of any other Enterprise which such person is or was serving at the request of the Company.

(b)    “ Enforcement Expenses ” shall include all reasonable attorneys’ fees, retainers, court costs, transcript costs, fees of experts, witness fees, travel expenses, duplicating costs, printing and binding costs, telephone charges, postage, delivery service fees, and all other disbursements or expenses of the types customarily incurred in connection with an action to enforce indemnification or advancement rights, or an appeal from such action, including without limitation the premium, security for, and other costs relating to any cost bond, supersedes bond, or other appeal bond or its equivalent.

(c)    “ Enterprise ” shall mean any corporation (other than the Company), partnership, joint venture, trust, employee benefit plan or other legal entity of which Indemnitee is or was serving at the request of the Company as a director, officer, employee, agent or trustee.

(d)    “ Expenses ” shall include all reasonable attorneys’ fees, retainers, court costs, transcript costs, fees of experts, witness fees, travel expenses, duplicating costs, printing and binding costs, telephone charges, postage, delivery service fees, and all other disbursements or expenses of the types customarily incurred in connection with prosecuting, defending, preparing to prosecute or defend, investigating, being or preparing to be a witness in, or otherwise participating in, a Proceeding or an appeal resulting from a Proceeding, including without limitation the premium, security for, and other costs relating to any cost bond, supersedes bond, or other appeal bond or its equivalent. Expenses, however, shall not include amounts paid in settlement by Indemnitee or the amount of judgments or fines against Indemnitee.

(e)    “ Independent Counsel ” means a law firm, or a partner (or, if applicable, member) of such a law firm, that is experienced in matters of Delaware corporation law and neither presently is, nor in the past five years has been, retained to represent: (i) the Company, any Enterprise or Indemnitee in any matter material to any such party (other than with respect to matters concerning Indemnitee under this Agreement, or of other indemnitees under similar indemnification agreements), or (ii) any other party to the Proceeding giving rise to a claim for indemnification hereunder. Notwithstanding the foregoing, the term “Independent Counsel” shall not include any person who, under the applicable standards of professional conduct then prevailing, would have a conflict of interest in representing either the Company or Indemnitee in an action to determine Indemnitee’s rights under this Agreement. The Company agrees to pay the reasonable fees and expenses of the Independent Counsel referred to above and to fully indemnify such counsel against any and all expenses, claims, liabilities and damages arising out of or relating to this Agreement or its engagement pursuant hereto.

(e)    The term “ Proceeding ” shall include any threatened, pending or completed action, suit, arbitration, alternate dispute resolution mechanism, investigation, inquiry, administrative hearing or any other actual, threatened or completed proceeding, whether brought in the right of the Company or otherwise and whether of a civil, criminal, administrative or investigative nature, in which Indemnitee was, is or will be involved as a party or otherwise by reason of the fact that Indemnitee is or was an officer and/or director of the Company or is or was serving at the request of the Company as a director, officer, employee, agent or trustee of any Enterprise or by reason of any action taken by him or of any action taken on his part while acting as director of the Company or while serving at the request of the Company as a director, officer, employee, agent or trustee of any Enterprise, in each case whether or not serving in such capacity at the time any liability or expense is incurred for which indemnification, reimbursement or advancement of expenses can be provided under this Agreement; provided , however , that the term “Proceeding” shall not include any action, suit or arbitration, or part thereof, initiated by Indemnitee to enforce Indemnitee’s rights under this Agreement as provided for in Section 13(e) of this Agreement.

Section 3.     Indemnity in Third-Party Proceedings . The Company shall indemnify Indemnitee in accordance with the provisions of this Section 3 if Indemnitee is, or is threatened to be made, a party to or a participant in any Proceeding, other than a Proceeding by or in the right of the Company to procure a judgment in its favor. Pursuant to this Section 3, Indemnitee shall be indemnified against all Expenses, judgments, fines and amounts paid in settlement actually and reasonably incurred by Indemnitee or on his behalf in connection with such Proceeding or any claim, issue or matter therein, if Indemnitee acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Company and, in the case of a criminal proceeding, had no reasonable cause to believe that his conduct was unlawful. Indemnitee shall not enter into any settlement in connection with a Proceeding without ten (10) days’ prior notice to the Company.

Section 4.     Indemnity in Proceedings by or in the Right of the Company . The Company shall indemnify Indemnitee in accordance with the provisions of this Section 4 if Indemnitee is, or is threatened to be made, a party to or a participant in any Proceeding by or in the right of the Company to procure a judgment in its favor. Pursuant to this Section 4, Indemnitee shall be indemnified against all Expenses actually and reasonably incurred by him or on his behalf in connection with such Proceeding or any claim, issue or matter therein, if Indemnitee acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Company. No indemnification for Expenses shall be made under this Section 4 in respect of any claim, issue or matter as to which Indemnitee shall have been finally adjudged by a court to be liable to the Company, unless and only to the extent that the Delaware Court of Chancery (the “ Delaware Court ”) or any court in which the Proceeding was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, Indemnitee is fairly and reasonably entitled to indemnification for such expenses as the Delaware Court or such other court shall deem proper.

Section 5.     Indemnification for Expenses of a Party Who is Wholly or Partly Successful . Notwithstanding any other provisions of this Agreement and except as provided in Section 8, to the extent that Indemnitee is a party to or a participant in and is successful, on the merits or otherwise, in any Proceeding or in defense of any claim, issue or matter therein, the Company shall indemnify Indemnitee against all Expenses actually and reasonably incurred by him in connection therewith. If Indemnitee is not wholly successful in such Proceeding but is successful, on the merits or otherwise, as to one or more but less than all claims, issues or matters in such Proceeding, the Company shall indemnify Indemnitee against all Expenses actually and reasonably incurred by him or on his behalf in connection with each successfully resolved claim, issue or matter. For purposes of this Section and without limitation, the termination of any claim, issue or matter in such a Proceeding by dismissal, with or without prejudice, shall be deemed to be a successful result as to such claim, issue or matter.

Section 6.     Indemnification For Expenses of a Witness . Notwithstanding any other provision of this Agreement, to the extent that Indemnitee is, by reason of his Corporate Status, a witness in any Proceeding to which Indemnitee is not a party and is not threatened to be made a party, he shall be indemnified against all Expenses actually and reasonably incurred by him or on his behalf in connection therewith.

Section 7.     Additional Indemnification .
(a)     Except as provided in Section 8, notwithstanding any limitation in Sections 3, 4 or 5, the Company shall indemnify Indemnitee to the fullest extent permitted by law if Indemnitee is a party to or is threatened to be made a party to any Proceeding (including a Proceeding by or in the right of the Company to procure a judgment in its favor) against all Expenses, judgments, fines and amounts paid in settlement actually and reasonably incurred by Indemnitee in connection with the Proceeding.
(b)    For purposes of Section 7(a), the meaning of the phrase “to the fullest extent permitted by law” shall include, but not be limited to:

(i)    to the fullest extent permitted by the provision of the DGCL that authorizes or contemplates additional indemnification by agreement, or the corresponding provision of any amendment to or replacement of the DGCL or such provision thereof; and

(ii)    to the fullest extent authorized or permitted by any amendments to or replacements of the DGCL adopted after the date of this Agreement that increase the extent to which a corporation may indemnify its officers and directors.
Section 8.     Exclusions . Notwithstanding any provision in this Agreement to the contrary, the Company shall not be obligated under this Agreement:
(a)    to make any indemnity for amounts otherwise indemnifiable hereunder (or for which advancement is provided hereunder) if and to the extent that Indemnitee has otherwise actually received such amounts under any insurance policy, contract, agreement or otherwise;
(b)    to make any indemnity for an accounting of profits made from the purchase and sale (or sale and purchase) by Indemnitee of securities of the Company within the meaning of Section 16(b) of the Securities Exchange Act of 1934, as amended, or similar provisions of state statutory law or common law; or
(c)    to make any indemnity or advancement that is prohibited by applicable law.

Section 9.     Advances of Expenses . The Company shall advance, to the extent not prohibited by law, the Expenses incurred by Indemnitee in connection with any Proceeding, and such advancement shall be made within twenty (20) days after the receipt by the Company of a statement or statements requesting such advances (which shall include invoices received by Indemnitee in connection with such Expenses but, in the case of invoices in connection with legal services, any references to legal work performed or to expenditures made that would cause Indemnitee to waive any privilege accorded by applicable law shall not be included with the invoice) from time to time, whether prior to or after final disposition of any Proceeding. Advances shall be unsecured and interest free. Advances shall be made without regard to Indemnitee’s ability to repay the expenses and without regard to Indemnitee’s ultimate entitlement to indemnification under the other provisions of this Agreement. Indemnitee shall qualify for advances upon the execution and delivery to the Company of this Agreement which shall constitute an undertaking providing that Indemnitee undertakes to the fullest extent required by law to repay the advance if and to the extent that it is ultimately determined by a court of competent jurisdiction in a final judgment, not subject to appeal, that Indemnitee is not entitled to be indemnified by the Company. The right to advances under this paragraph shall in all events continue until final disposition of any Proceeding, including any appeal therein. Nothing in this Section 9 shall limit Indemnitee’s right to advancement pursuant to Section 13(e) of this Agreement.

Section 10.     Procedure for Notification and Defense of Claim .
(a)    To obtain indemnification under this Agreement, Indemnitee shall submit to the Company a written request therefor and, if Indemnitee so chooses pursuant to Section 11 of this Agreement, such written request shall also include a request for Indemnitee to have the right to indemnification determined by Independent Counsel.

(b)    The Co